Regulation and Compliance State Regulation

Nevada Oversteps Its Authority on Fiduciary Reg: Trade Groups

News March 01, 2019 at 03:27 PM
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Industry trade groups told the Nevada Securities Division on Friday that it should not only hold off in moving forward with its draft fiduciary duty regulation until the Securities and Exchange Commission finalizes its Regulation Best Interest — which is likely to be published before the fourth quarter — but that the state is reaching beyond its legal authority.

In a joint comment letter, a number of groups — including the Securities Industry and Financial Markets Association, the Financial Services Institute, the U.S. Chamber of Commerce, the American Council of Life Insurers, the National Association of Insurance and Financial Advisors, and the Insured Retirement Institute, among others — argued that the SEC is "developing a uniform, nationwide, heightened best interest standard of conduct for broker-dealers," and that "a national standard provides enhanced investor protection, avoids investor confusion, and is much easier to administer and operationalize than an uneven patchwork of state laws."

If Nevada decides to move ahead before SEC issues Reg BI, the group stated, "we would suggest you clarify that firms that comply with Reg BI, once adopted, will be deemed to be fully compliant with the Nevada law."

Nevada's Legislature passed its own fiduciary statute for securities in 2017, but the law couldn't be implemented until regulations were put into place. Nevada issued those proposed regs on Jan. 18, with a comment period that expired Friday.

Legal Deficiencies

The groups told the Nevada Securities Division that its proposal creates pre-emption issues and legal deficiencies, namely because it conflicts with the National Securities Markets Improvements Act, the Investment Advisers Act, the Employee Retirement Income Security Act and the Federal Arbitration Act, among others.

"We previously raised NSMIA concerns in our early letters to the Division and in subsequent testimony," the groups wrote. "Unfortunately, the draft regulations do not alleviate these concerns."

Specifically, the groups maintain that the state "is pre-empted from imposing regulatory requirements on registered investment advisers as its jurisdiction is limited to enforcement of antifraud provisions. The law and draft regulations go well beyond the state's legal authority. The state is also pre-empted from imposing different or additional recordkeeping requirements" on broker-dealers.

IAA Weighs In

The Investment Adviser Association also told the Nevada Securities Division in its Friday comment letter that it needs to "make clear that any final regulations do not apply to SEC advisers or their representatives, consistent with NSMIA," IAA General Counsel Gail Bernstein wrote.

Title III of NSMIA, the Investment Advisers Supervision Coordination Act, "broadly pre-empts state regulation" of SEC-registered investment advisers, IAA states.

"For more than 20 years, federal law has prohibited states from adopting any rules, interpretations, or guidance that would have the effect of substantively regulating SEC-registered advisers," said Karen Barr, IAA's president and CEO, in a separate statement. "The IAA will engage with policymakers in any state that appears to be moving in that direction."

The Nevada draft regs apply to investment advisors, but "It is not clear as written whether that term includes only investment advisers registered or required to be registered" in Nevada, or also RIAs, which would be preempted by NSMIA.

To clarify that the regulations do not and are not intended to apply to RIAs or representatives of SEC-registered advisors, Berstein said, IAA suggests adding to Section 10 of the reg, entitled "Authority to conform to federal or state rules/interpretation," a new subsection.

Further, Berstein argued that any state attempt to "substantively regulate" RIAs "is not saved by the fact that its rules track or purport to track existing SEC rules because the state's rules cannot be enforced against" RIAs.

States, she said, "may investigate and bring enforcement actions with regard to fraud and deceit against SEC advisers, but they may not regulate" their conduct.

As previously raised, "a key reason for the enactment of NSMIA was to eliminate duplicative regulation," Berstein stated.

"Thus, absent a clear statement that the rules do not apply to SEC advisers, simply having duplicative rules on the books raises concerns" because it imposes burdens on RIAs that do business in that state to "determine whether and how those rules might apply to them."

Also, she wrote, "maintaining such rules also imposes an ongoing obligation on the state to keep track of all related SEC developments, including guidance and interpretations from the SEC or SEC staff, to ensure that the state's rules remain fully consistent with the corresponding SEC provisions."

CFA, Institute for Fiduciary Standard Comment 

Noting the "unfortunate demise" of the Labor Department's fiduciary rule, fiduciary advocate groups like the Consumer Federation of America and the Institute for the Fiduciary Standard, stated in a joint letter the "clear deficiencies" in the SEC's proposed Reg BI, and said they "greatly appreciate states such as Nevada that are willing to step in to fill the regulatory void by providing the protections investors need and expect."

The groups argued that aspects of the Nevada proposal "are vastly more protective of investors than corresponding provisions" in Reg BI, including the provisions "that apply a fiduciary standard across an appropriately broad range of advisory activities. We urge the Division to retain those protections in a final rule."

At the same time, however,"other aspects of the proposal need to be clarified and strengthened in order to better achieve the intended improvement in protections for investors," the groups said.

Specifically, they urge Nevada "to clarify what's required under the fiduciary standard and to reinforce that standard with strong anti-conflict requirements. This will help to ensure that advice is not tainted by conflicts of interest, to investors' detriment."

Another area that needs clarification, they said, is that similar to Reg BI, the Nevada proposal "doesn't define best interest. As a result, it's not clear how or whether the proposed standard improves on the existing FINRA suitability standard."

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