Compliance Consult | PLANADVISER July/August 2017

Nevada's New Standard

Might other states apply this fiduciary guideline to advisers?

By David Kaleda | July/August 2017

PAJF16_Article-Image-Comp-Con-_David-Kaleda-Portrait_Tim-Bower.jpgArt by Tim BowerOn June 17, the governor of Nevada signed into law a bill that requires advisers to be subject to a fiduciary standard under that state’s law. The law became effective on July 1 and comes on the heels of the Department of Labor (DOL)’s implementation of its final regulation redefining “investment advice.” The Nevada law raises important conflict of laws and federal pre-emption issues, the former being a procedural dilemma calling for a court to sort out conflicting applicable laws of different jurisdictions, and the latter being the problem of whether, in this instance, federal law overrides the state’s. It also likely will impose additional compliance burdens on advisers who operate in Nevada. Further, the steps taken by the state beg the question whether other states will also try to impose a fiduciary standard on advisers.

Prior Nevada law required that “financial planners” be subject to a fiduciary standard. However, it excluded most broker/dealers (B/Ds), sales representatives and investment advisers. With the enactment of the new law, these exclusions have been removed from the statute. Therefore, a broker/dealer, sales representative or investment adviser is a “financial planner” if it “for compensation advises others upon the investment of money or upon provision for income to be needed in the future, or who holds himself or herself out as qualified to perform either of these functions.”

In other words, most advisers will be financial planners and subject to state law requirements even if the adviser is already subject to the Securities Exchange Act of 1934, Advisers Act of 1940, Employee Retirement Income Security Act of 1974 (ERISA), Internal Revenue Code of 1986 (IRC), and the regulations promulgated thereunder. Nevada law requires that he be subject to a fiduciary standard and requires that the adviser: 1) at the time advice is given, disclose any gain he will receive if advice is followed, and 2) “make diligent inquiry of each client to ascertain initially, and keep currently informed concerning, the client’s financial circumstances and obligations and the client’s present and anticipated obligations to and goals for his or her family.” The statute provides that the adviser is responsible for “the amount of the economic loss and all costs of litigation and attorney’s fees” resulting from a violation of his or her fiduciary duty, gross negligence or violation of Nevada law.

Nevada’s new requirements may prove challenging for firms with advisers in multiple states including Nevada. Such firms will have to properly identify those advisers who provide investment advice in Nevada and then possibly apply a compliance program that is different than that which would be applied in other states or under federal law. Firms that provide advice over the internet or by similar means—e.g., robo-advisers—may face even greater challenges because it may be difficult to identify when investment advice is provided in Nevada.

Further, firms and their advisers are subject to financial liability under Nevada law. Advisers need to consider whether they will provide services to clients in Nevada under these circumstances and, if so, how they will comply while still meeting the state’s obligations under Securities and Exchange Commission (SEC) and Department of Labor regulations.

There is more to come. The Nevada securities division of the office of the secretary of state is authorized to issue regulations defining or excluding an “act, practice or course of business” of an adviser as a violation of a fiduciary act. Therefore, the Nevada securities administrator could use her authority to better align the Nevada law with federal law, although whether she will do so remains to be seen. Moreover, there are questions whether the statute is pre-empted by federal law and thus not applicable, in whole or in part, to at least some advisers.

The larger question here is whether other states will follow Nevada’s lead. This outcome certainly is conceivable as some may attempt to conform to the DOL’s recent investment advice regulation, create a uniform fiduciary standard applicable to broker/dealers and investment advisers doing business in their states, or fill perceived gaps in federal law. Indeed, reported on July 3 that Connecticut passed a law requiring service providers to non-ERISA 403(b) plans to provide disclosures similar to whose required under Section 408(b)(2) of ERISA. If other states move in this direction, advisers could face a perfect storm of compliance with multiple federal laws and the laws of multiple states.

David Kaleda is a principal in the fiduciary responsibility practice group at Groom Law Group, Chartered, in Washington, D.C. He has an extensive background in the financial services sector. His range of experience includes handling fiduciary matters affecting investment managers, advisers, broker/dealers, insurers, banks and service providers. He served on the Department of Labor’s ERISA Advisory Council from 2012 through 2014.