Nevada has released a proposed regulation to regulate broker-dealers and their advisors as fiduciaries. In 2017, the state amended its securities law to provide that broker-dealers and investment advisers owe a fiduciary duty to their customers, but the change didn’t provide details on what that meant. Instead, the legislation required that a regulation be issued to explain and implement the change. Nearly a year and a half later, a proposed regulation has been released.
The proposal surprised many in the broker-dealer community because the definition of “fiduciary” is very broad and the related duties are stringent. The requirements go beyond the proposed SEC rules under Reg BI. However, there is a nod in that direction – the Nevada proposal says the Securities Administrator can adopt by order any “fiduciary duty related rule” approved by the SEC, so long as that rule doesn’t “materially diminish the fiduciary duty” set out in Nevada law and regulation.
Nevada’s proposed regulations are more demanding than Reg BI in several respects. In fact, some of the requirements are similar to those in the DOL’s vacated Best Interest Contract Exemption, though stated in different terms. Here are some differences from the SEC’s proposed Reg BI:
- One major difference is that Nevada law affirmatively states that broker-dealers owe a fiduciary duty for most of their advice to customers. Reg BI requires that firms act in the best interest of their customers, but doesn’t say they are fiduciaries.
- Under Nevada law, a customer can sue an advisor (at a broker-dealer or RIA) for breach of fiduciary duty. This is generally referred to as having a “private right of action.” Under Reg BI, there is no private right of action.
- The Nevada proposal requires a more in-depth disclosure of compensation than Reg BI. For example, a broker-dealer is required to disclose the “gain” it receives at the time advice is given. “Gain” is defined to include managed asset fees, commissions, mark up and mark down commissions, volume discounts given to clients, trailing fees or commissions, front end or back end loads, service fees, and payments for order flow. In contrast, Reg BI appears to require generic disclosures of the types of compensation and the amounts generally charged.
- The Nevada proposal makes clear that a broker-dealer has a fiduciary duty to monitor a customer’s account under several common scenarios, while that is not required by proposed Reg BI. The Nevada proposal explains this monitoring requirement in a circular way. It provides for an “Episodic Fiduciary Duty Exemption,” which says that a broker-dealer has a fiduciary duty for a specific transaction, but does not have an ongoing duty — so long as it does not provide certain services or communications. However, that exemption doesn’t apply in the following scenarios: managing the customer’s assets, creating periodic financial plans, discretionary trading of the account, or a representative of a broker-dealer identifying as an adviser, financial consultant, wealth manager or counselor. There are two other situations that make the Episodic exemption unavailable: if a broker-dealer has not “otherwise developed a fiduciary relationship with the client from previous or concurrent services undertaken on behalf of the client” or if the surrounding facts and circumstances don’t indicate that ongoing advice is “reasonably expected by the client relative to [a] transaction, type of product or advice.” The latter might exist, for example, if an advisor were to tell a customer that “I’ll keep an eye on your account” or “Don’t worry, I’ll watch out for you.”
This is a proposal, and it may change before it becomes final. However, if it remains the same, the Nevada proposal will go beyond what the SEC is proposing, and it may be an indication of what we can expect in the future in other states.
The Drinker Biddle Best Interest Compliance Team has put together a chart of state investment fiduciary activity, which can be accessed here.