State Fiduciary Laws Seen Adding to Chaos, Confusion
October 24, 2017 by Rita Raagas De Ramos
Proponents and critics of the Department of Labor’s fiduciary rule finally agree on something: States coming up with their own fiduciary laws just add to the chaos and confusion.
Nevada passed and signed into law its Senate Bill 383, subjecting broker-dealers and investment advisors – effective July 1 – to the Nevada Revised Statute for financial planners, NRS 628A. The law effectively imposes a statutory fiduciary duty on broker-dealers and investment advisors to act in the best interest of their clients and comply with disclosure requirements.
Nevada’s secretary of state is in the process of considering and drafting regulations relating to this fiduciary duty. The office says the draft regulations will identify acts, practices, or courses of business that may be excluded as a violation of the fiduciary duty.
During a rulemaking workshop conducted in Las Vegas earlier this month by the securities division of Nevada’s secretary of state, Lisa Bleier, Sifma associate general counsel and managing director for public policy and advocacy, voiced why the broker-dealer lobby group thinks a state-by-state approach to fiduciary rulemaking is a bad idea.
She said the approach “would subject financial professionals and firms to a confusing and potentially contradictory array of requirements and further muddy the waters for consumers trying to determine their relationship with their broker.”
Christopher Lewis, deputy general counsel at Edward Jones, said at a Practicing Law Institute conference last month the initiatives undertaken by Nevada and other states are among the “profound” changes triggered by the DOL’s fiduciary rule. Connecticut has also signed a bill to expand its fiduciary requirements on brokers while lawmakers in New York, New Jersey and Massachusetts have introduced similar measures.
“State laws are encroaching in this area,” he said. “There is a sense that this [Donald Trump’s] administration will pull back on regulations, so we expect to see a lot more states move into the space.”
The problem with having state fiduciary laws is they “are not going to be consistent,” Lewis said. “If state laws proliferate across the country, then we’re back to a place of having different standards to adapt to.”
Barbara Roper, director of investor protection at the Consumer Federation of America, says state-by-state fiduciary laws could potentially create more loopholes that might disadvantage consumers.
For example, she says the new Nevada law excludes insurance agents from the financial planner category.
“Given that insurance agents act as financial planners or retirement planners, leaving them out of the new state law seems like a pretty significant shortcoming,” she says. “If they’re going to tackle this at the state level it should be done in such a way that it covers all financial planners or advisors.”
Roper says it’s frustrating that lobbying against the DOL fiduciary rule caused a delay in its initial implementation, and that its full implementation remains subject to a review. That frustration has contributed greatly to the initiatives of various states to enact their own fiduciary laws to ensure the protection of the investors in their respective states, she claims.
At a hearing last month by the House Subcommittee on Capital Markets, Securities and Investments, Rep. David Scott, D-Ga., said that he, like other legislators, place part of the blame for the delay in the full implementation of the DOL rule on the SEC. He said he and other legislators had been urging the SEC to come up with a uniform fiduciary standard. “Their failure to do so has put us in a difficult situation,” he said at the time.
Bleier said Sifma is concerned that any new fiduciary duties under the new Nevada law would impose additional recordkeeping requirements that would violate the National Securities Markets Improvement Act of 1996. She said NSMIA precludes states from enacting regulations relating to the making and keeping of records “that differ from or are in addition to” the requirements in those areas established under the Securities Exchange Act of 1934.
“We are hardpressed to envision a scenario in which new duties do not require the creation of a new record,” she said.
Bleier said the new Nevada law’s disclosure and information collection requirements will need to be fulfilled in writing or verbally but followed by the creation of a written record to document compliance.
Specifically, she said the new Nevada law requires broker-dealers and investment advisors to disclose to a client – at the time advice is given – any gain they may receive, such as profit or commission, if the advice is followed. She said it also requires broker-dealers and investment advisors to determine and update the client’s financial circumstances, as well as current and future obligations.
Bleier said Sifma disagrees with the new Nevada law lumping “all broker-dealers, investment advisors and their sales representatives” in the same category as financial planners. She added that the new Nevada law should define the parameters of “advice” and “profit.”
There are instances when the activities of broker-dealers, investment advisors and their sales representatives fall “outside the definition of financial planner and the intent of the new law,” she said. A person should not be considered a financial planner unless the person gives advice on the investment of money in exchange for compensation, she said.
She tells FA-IQ that broker-dealers who are not necessarily providing their clients with advice will be forced to increase the fees they charge clients because of the costs associated with complying with new fiduciary standard rules, whether they be the DOL rule or state rules.
She says examples of broker-dealer activities that don’t include giving advice are providing general research and strategy literature; discussing general investment and allocation strategies; seminar content not specific to a customer; general marketing and education materials not specific to a customer; financial planning tools and calculators that use customer information but do not recommend specific securities; providing web sites where retail customers use tools to analyze securities to make self-directed investment decisions; holding securities, including concentrated positions or other complex or risky investment strategies, at the customers’ request in a nondiscretionary account; and taking and executing unsolicited customer orders.
In her testimony, Bleier raised one point that isn’t specifically addressed in the new Nevada law: the impact of the state law on arbitration agreements.
She said Sifma wants Nevada’s secretary of state “to clarify that the new law has no effect on arbitration agreements.” She noted that the new state law permits parties to file new civil actions against broker-dealers and investment advisors.
“We are concerned that the language, as it stands, could lead to confusion and increased filings in civil court,” she said, asking that the rules being drafted for the new state law “explicitly state” that it does not affect the rights of any party in relation to the arbitration of any dispute under the Federal Arbitration Act (FAA) or any agreed-to pre-dispute arbitration agreement.
Jill Gross, a law professor at Pace University, said at the Practicing Law Institute conference last month that she believes “any state law that tries to outlaw in any shape or form mandatory arbitration in customer agreements will be preempted by the FAA.”
