Groups urge curbs on Nevada fiduciary rules

Sep 11, 2017
State introduces regulations requiring broker-dealers and investment advisers to act in clients’ best interests

A coalition of 12 industry groups has called on regulators in Nevada to tread carefully in designing rules to implement a recently enacted law that will expand the population of financial service providers that must act in clients’ best interests.

The effort echoes extensive lobbying by the industry in Washington, DC as firms seek to water down or stop the US Department of Labor’s (DoL) fiduciary rule for brokers offering retirement advice. The new Nevada law removes the exemption for broker-dealers, investment advisers and sales representatives from the definition of ‘financial planner’ and requires that they not violate the fiduciary duty toward clients imposed on financial planners.

In a recent letter to Diana Foley, securities administrator in the state’s office of the secretary of state, the groups – which include the Securities Industry and Financial Markets Association (Sifma), Financial Services Institute, Center for Capital Markets Competitiveness and Bond Dealers of America – present a laundry list of concerns and warnings they hope will be taken into account in the drafting of regulations.

For example, they write that although the new law eliminates the exemption for broker-dealers, investment advisers and sales reps, it does not automatically make all such entities financial planners. ‘They, by their activities, must still satisfy the financial planner definition,’ the groups say. ‘There are certainly instances in which an entity falls outside the definition of financial planner and the intent of the new law, including, for example, clearing [broker-dealers].’

 

LIMITS AND EXEMPTIONS

The groups also argue that certain activities should be excluded from the scope of the pending rules – basic foundational activities of a relationship between clients and broker-dealers, investment advisers and sales reps where no specific personalized advice is given. As such, they ask for activities including the following to be excluded:

  • Providing general research and strategy literature
  • Discussing general investment and allocation strategies
  • General marketing and education materials that are not specific to a customer
  • Broker-dealer investing websites where retail customers use tools to analyze securities to make self-directed investment decisions.

The groups are worried that laws such as the one in Nevada will result in inconsistent definitions and interpretations as to what constitutes a fiduciary and will subject financial professionals and firms to ‘a confusing and potentially contradictory array of requirements.’ They urge Foley to tie any specific requirements to Financial Industry Regulatory Authority rules and guidance.

‘We further understand that you are considering using the [DoL fiduciary rule] as a basis for your state law,’ the groups write. ‘While we appreciate your interest in trying to achieve consistency, the [DoL rule], as currently drafted, has significant flaws, including limiting investor choice in how to pay for retirement services, reducing access to investment advice, and limiting investor choice in retirement products.’

Sifma commissioned Deloitte to conduct a survey on the impact of the DoL rule; it finds that the 21 Sifma member firms taking part in the study have together spent more than $595 million on preparing for the initial implementation deadline this summer, and expect to spend more than $200 million on top of that by the end of 2017 in terms of start-up costs.

The Deloitte report states that, as of June 9, 53 percent of respondent firms reported limiting or eliminating access to advised brokerage for retirement investors, affecting 10.2 million accounts and $900 billion in assets under management (CorporateSecretary.com, 8/16).

Among other things, the groups argue in the letter to Foley that:

  • Institutional investors and ‘sophisticated governmental entities’ should be excluded from the measure
  • The state’s planned rules should be limited to customers with Nevada domiciles who have a financial planner registered in the state
  • These rules should clarify that the new civil cause of action would not affect arbitration agreements.
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