Compliance

Can States Pick Up DOL Fiduciary Enforcement Slack?

There are certainly states that are attempting to do so, but it’s unclear whether ERISA’s preemption of state law will render their efforts toothless. 

By John Manganaro editors@strategic-i.com | August 01, 2017

A Client Alert shared by Stradley Ronon, penned by ERISA attorneys George Michael Gerstein, Jessica Burt, and James Severs, warns that several states are in the process of debating and potentially adopting their own legislation relating to the fiduciary responsibilities of broker/dealers and investment advisers.

The laws could make for some interesting and challenging legal circumstances in the future, the alert warns, given that the Employee Retirement Income Security Act (ERISA) is generally understood to preempt state law. In recent years this generally meant that the Department of Labor (DOL) could enforce more rigorous conflict of interest standards on behalf of retirement investors than the individual regulators in more conservative states were apt to do. However, now that Republicans have regained control of Congress and the White House and are aiming at relaxing the recently expanded fiduciary rule the Obama administration sought to establish under ERISA, some states are considering what powers they have to pick up the slack.

Among the states debating/implementing their own conflict of interest rules are Connecticut, New Jersey and New York. Effective July 1, according to the Stradley Ronon attorneys, broker/dealers and investment advisers operating in Nevada became subject to the state’s financial planner statue, known as NRS 628A, “making them fiduciaries to their clients and requiring them to submit to a rigorous disclosure regimen.” 

Similar to the approaches being take elsewhere, in Nevada, the newly adopted legislation removes existing exemptions for broker/dealers, investment advisers and their respective representatives from the definition of a “financial planner.” The statutory fiduciary duty specifically requires financial planners to “disclose to a client, at the time advice is given, any gain the financial planner may receive such as profit or commission, if the advice is followed.”

The statutory fiduciary duty also requires financial planners, through a “diligent inquiry of each client,” to make an initial determination of suitability of the advice to be given to each client as well as to evaluate such suitability on an ongoing basis. As the attorneys note, in making such determinations of suitability, the financial planner should consider “the client’s financial circumstances and obligations and the client’s present and anticipated obligations to and goals for his or her family.”

“Broker-dealers, investment advisers and their respective representatives will be financial planners under Nevada law if they advise others for compensation upon the investment of money or upon provision for income to be needed in the future, or if they hold themselves out as qualified to perform either of these functions,” the attorneys explain. “As financial planners, they will now be subject to Nevada’s statutory fiduciary duty with respect to advice that they provide to Nevada clients.”

Crucial to note, the attorneys argue, whether or not advisers/brokers registered with the U.S. Securities and Exchange Commission are exempt from the Nevada laws on federal preemption grounds “is an open question.” It will be an important question to answer, given that the legislation also grants to the clients of financial planners a statutory right of action if the financial planner violates any element of the fiduciary duty, is grossly negligent in the provision of advice to the client, or violates any state law in the provision of investment advice.

The full client alert can be downloaded here