Industry trade groups told the Nevada Securities Division on Friday that it should not only hold off in moving forward with its draft fiduciary duty regulation until the Securities and Exchange Commission finalizes its Regulation Best Interest — which is likely to be published before the fourth quarter — but that the state is reaching beyond its legal authority.
In a joint comment letter, a number of groups — including the Securities Industry and Financial Markets Association, the Financial Services Institute, the U.S. Chamber of Commerce, the American Council of Life Insurers, the National Association of Insurance and Financial Advisors, and the Insured Retirement Institute, among others — argued that the SEC is “developing a uniform, nationwide, heightened best interest standard of conduct for broker-dealers,” and that “a national standard provides enhanced investor protection, avoids investor confusion, and is much easier to administer and operationalize than an uneven patchwork of state laws.”
If Nevada decides to move ahead before SEC issues Reg BI, the group stated, “we would suggest you clarify that firms that comply with Reg BI, once adopted, will be deemed to be fully compliant with the Nevada law.”
Nevada’s Legislature passed its own fiduciary statute for securities in 2017, but 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 expired Friday.
The groups told the Nevada Securities Division that its proposal creates pre-emption issues and legal deficiencies, namely because it conflicts with the National Securities Markets Improvements Act, the Investment Advisers Act, the Employee Retirement Income Security Act and the Federal Arbitration Act, among others.
“We previously raised NSMIA concerns in our early letters to the Division and in subsequent testimony,” the groups wrote. “Unfortunately, the draft regulations do not alleviate these concerns.”
Specifically, the groups maintain that the state “is pre-empted from imposing regulatory requirements on registered investment advisers as its jurisdiction is limited to enforcement of antifraud provisions. The law and draft regulations go well beyond the state’s legal authority. The state is also pre-empted from imposing different or additional recordkeeping requirements” on broker-dealers.
IAA Weighs In
The Investment Adviser Association also told the Nevada Securities Division in its Friday comment letter that it needs to “make clear that any final regulations do not apply to SEC advisers or their representatives, consistent with NSMIA,” IAA General Counsel Gail Bernstein wrote.
Title III of NSMIA, the Investment Advisers Supervision Coordination Act, “broadly pre-empts state regulation” of SEC-registered investment advisers, IAA states.
“For more than 20 years, federal law has prohibited states from adopting any rules, interpretations, or guidance that would have the effect of substantively regulating SEC-registered advisers,” said Karen Barr, IAA’s president and CEO, in a separate statement. “The IAA will engage with policymakers in any state that appears to be moving in that direction.”
The Nevada draft regs apply to investment advisors, but “It is not clear as written whether that term includes only investment advisers registered or required to be registered” in Nevada, or also RIAs, which would be preempted by NSMIA.
To clarify that the regulations do not and are not intended to apply to RIAs or representatives of SEC-registered advisors, Berstein said, IAA suggests adding to Section 10 of the reg, entitled “Authority to conform to federal or state rules/interpretation,” a new subsection.