Nevada’s New Fiduciary Rule

Nevada’s New Fiduciary Rule

Attorney: Ryan Probstfeld, Edward Zusman, Jeffrey Compton

In 2016, the Department of Labor promulgated new rules which sought to expand the “investment advice fiduciary” definition under ERISA and elevate all financial professionals who work with retirement accounts to the level of a fiduciary, bound legally and ethically to act in the best interests of the customer.  The federal “Fiduciary Rule” was schedule to be phased in between April 10, 2017 and January 1, 2018, but was delayed.  Then in May 2017, the DOL issued additional guidance on the implementation of the rule and its enforcement.  The rule took effect on June 9, 2017, with enforcement of certain provisions delayed until the end of the rule’s phase-in period on January 1, 2018.

Concerned about the potential repeal of the DOL Fiduciary Rule under the Trump Administration, on June 2, 2017, Nevada Governor Brian Sandoval signed into law Nevada Senate Bill 383, which describes itself as:

“AN ACT relating to financial planners; imposing a fiduciary duty on broker-dealers, sales representatives and investment advisers who for compensation advise other persons concerning the investment of money; authorizing the Administrator of the Securities Division of the Office of the Secretary of State to adopt regulations concerning such fiduciary duty; providing penalties; and providing other matters properly relating thereto.”

SB 383 accomplishes this purpose by amending the definition of “Financial Planner” within NRS 628A.010(3).  In Nevada, “Financial Planner” is “a person who 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.”  Historically, however, broker-dealers and registered representatives, licensed or exempt, were excluded from this definition and subject to only limited fiduciary obligations.  SB 383 removes the exclusion for broker-dealers and registered representatives, and imposes fiduciary obligations on all financial service professionals, broker and advisor.   This new Nevada fiduciary rule took effect on July 1, 2017.

NRS 628A.020 sets forth the two distinct fiduciary obligations of all financial planners, including broker-dealers and registered representatives:

  1. To disclose to the client, at the time advice is given, any gain he may receive, such as profit or commission, if the advice is followed; and
  2. To make diligent inquiry of each client to ascertain initially, and keep himself currently informed concerning the client’s financial circumstances and obligations and the client’s present and anticipated obligations to and goals for his family.

In essence, Nevada’s fiduciary rule requires the disclosure of all profit or commission (any form of compensations) from the sale, and to obtain in-depth suitability and financial planning information from the client.

Unfortunately, Nevada has provided no guidance or further explanation of what these fiduciary obligations entail.  There is no Nevada case law interpreting NRS 628A, et seq.  Instead, the Nevada legislature granted Nevada’s securities commissioner, currently Diana Foley, the power to further define the fiduciary duty by defining certain acts as violations or exclusions from the duty and prescribing “means reasonably designed to prevent” violations.  Such rulemaking will apply to broker-dealers, registered representatives, and investment advisors.

We spoke with Commissioner Diana Foley and she said that Nevada’s Securities Division is working to draft and promulgate these new rules and clarifications regarding the fiduciary rule.  This rulemaking process, which will likely take more than six months, will be public in nature, with several workshops and open meetings and invitation for industry members to provide their comments and concerns.  Her intention is to provide ample information and training to interested individuals before the Securities Division begins enforcing the new fiduciary rule.  We recommend that you contact Ms. Foley at dfoley@sos.nv.gov with any questions or concerns.  We further recommend that you monitor and comment on any proposed regulations during the public comment period.

Unlike the DOL rule, Nevada’s fiduciary rule applies to all accounts, brokerage or advisory, qualified or non-qualified.  While the Federal DOL rule is currently limited to retirement accounts, Nevada brokers and advisors will owe these fiduciary obligations to all clients, irrespective of account type.  For this reason, Nevada’s fiduciary rule is much broader than its federal counterpart, and therefore poses supervisory concerns – such as how to determine which accounts are subject to this higher standard.  The safest approach would be to make certain you have a way to code Nevada accounts so that they can be supervised in accordance with Nevada’s fiduciary rules.

Beyond the regulatory concerns and the breadth of the rule, Nevada’s new fiduciary rule and statutory framework provide for a statutory private right of action.  Under NRS 628A.030, an investor may sue a financial planner (including brokers and advisors) in a civil action for “the economic loss and all costs of litigation and attorney’s fees” that result from a financial planner’s advice if the financial planner:

  1. Violated any element of his or her fiduciary duty;
  2. Was grossly negligent in selecting the course of action advised, in light of all the client’s circumstances known to the financial planner; or
  3. Violated any Nevada law in recommending the investment or service.

This private right of action is broad and concerning since neither case law nor the Nevada regulator have provided any guidance as to scope of the fiduciary duty.  While the Securities Division itself may not be immediately enforcing the rule until further clarification is provided, Ms. Foley was very clear that the law “is what it is.”  By that statement, she indicated that the Securities Division will not and cannot control investors or prevent lawsuits asserting this new cause of action.  It is the responsibility of broker-dealers, brokers, and advisors to ensure their compliance with the fiduciary rule until Ms. Foley and the Securities Division can promulgate new rules and provide clarification of the fiduciary obligations.

In the midst of this uncertainty, it may be prudent for broker-dealers, registered representatives, and advisor representatives conducting business in Nevada to implement some or all of the following protections:

  • Collect detailed suitability information from each client, including the client’s financial circumstances, financial liability and obligations (current and anticipated), and the financial goals for the client and his family. This can be done on an updated account information form, or in broker/advisor notes pursuant to conversations with the client.  Suitability information should be updated on at least an annual basis, and before the purchase of any alternative or direct investment.
  • Provide written disclosure of the amount of the commission for each investment to the client prior to the client’s purchase. Inclusion of a commission amount in a written confirmation will likely not be sufficient.
  • Prior to purchase, disclose any profit, other than commission, that the broker-dealer, broker, or advisor will receive from the investment. By way of example, if the broker-dealer obtained a due diligence fee from the sponsor of a private placement, that payment should be disclosed the investor prior to purchase.  While Nevada’s fiduciary rule does not expressly provide an exemption for best interest contracts, broker-dealers, brokers, and advisors may consider entering into similar contracts to ensure disclosure of variable forms of profit and compensation.