Private fund managers, take heed: Under Nevada’s fiduciary plan, communications by fund managers with prospective and current investors regarding their interests in a fund along with the fund’s features may be fiduciary investment advice — mirroring requirements set out in the now-defunct 2016 Labor Department fiduciary rule, attorney George Michael Gerstein states.
In Stradley Ronon’s Friday Fiduciary Governance Blog, Gerstein states that while discretionary management of a client’s assets is fiduciary conduct, the Nevada proposal states that a security that is specifically contained in the security’s “offering documents” is presumptively not investment advice unless, as part of the discussion, there is a recommendation of one product over another; a recommendation to buy, hold or sell a security; or advice on the purchase, hold, sale, or value of a security, to a client or limited group of clients.
However, Gerstein writes that “it is unclear what, beyond an offering memorandum, constitutes ‘offering documents’ for purposes of this presumption.”
He wonders: “Would a pitch book suffice? Would the materials necessarily have to be in written form and would they have to be shared with all prospective/current investors?”
Other information that seems to be investment advice under Nevada’s plan includes information about a fund that is not “specifically” described in an offering memorandum or other material that is an “offering document,” Gerstein states.
His advice: “Consider whether communications with a prospective investor regarding the attributes of two or more funds would give rise to ‘investment advice’ under the proposed definition.”
Gerstein adds that investment advisors as well as dual registrants face “a more expansive” investment advice scope under Nevada’s plan.
While Nevada’s legislature passed its own fiduciary statute for securities in 2017, the law couldn’t be implemented until regulations were put into place. Nevada issued those proposed regs on Jan. 18, with a comment period that expires on March 1.
State Fiduciary Plans Worrisome: Borzi
Phylllis Borzi, former head of Labor’s Employee Benefits Security Administration and the architect of Labor’s fiduciary rule, told ThinkAdvisor in a recent interview that the state fiduciary rules are worrisome.
“It is no secret that my general inclination is that we ought to have federal standards in this area. On the other hand, if the federal standard is nonexistent or weak or worse than current law, one can understand why the states will go forward” with their own advice-standards rules.
“There are lots and lots of conflicts of interest in insurance products, the way they are sold,” Borzi said, and at the state level insurance regulation is separate from securities regulation.
Borzi said that she’s been following the states’ fiduciary proposals in a “cursory fashion,” but the one commonality among them “appears to be that when the states are trying to regulate financial planning activities, the insurance industry, which is a very powerful lobbying force at the state level, always winds up not being subject to the rules, and that makes no sense to me.”
— Check out Maryland’s ‘Sweeping’ Fiduciary Bill Puts Advisors Under More Stringent Standard on ThinkAdvisor.