Nevada regulators shocked the industry last week with tough draft fiduciary regulations on broker-dealers and registered representatives.
With some are calling the latest state regs tougher than the Securities and Exchange Commission's best-interest proposal, it isn't all bad news for those who sell annuities in Nevada.
For one thing, commissions remain acceptable under the draft proposal, say experts from Stradley-Ronon's Fiduciary Governance Team.
"Commissions are seemingly preserved as a method of compensation, but the Proposal imposes 'best interest' and 'reasonable compensation' requirements," write lawyers for Stradley-Ronon, a Philadelphia law firm. "Unfortunately, the Proposal fails to define 'best interest' or otherwise provide any guidance on how a firm could demonstrate satisfaction of such requirements."
The Nevada Securities Division wants to finalize the rules required to implement a 2017 law to regulate financial advice. That law was passed by the legislature and signed by then-Gov Brian Sandoval.
State efforts at regulation took center stage once the Department of Labor fiduciary rule was wiped out by a federal appeals court last year. While the National Association of Insurance Commissioners is working on a model law for states, several are going ahead with their own rules.
New York passed rules establishing best-interest guidelines for all sales of annuities and life insurance. Those rules take effect in August. A Maryland commission released a report calling for tough regs last week and a bill is expected soon.
Barbara Roper, director of investor protection at the Consumer Federation of America, is bullish in the Nevada proposal.
"There’s a lot that we like about the Nevada proposal, particularly with regard to the scope of its coverage," she said. "The SEC can and should learn from how Nevada handles issues related to ongoing duty, hat switching, holding out, and recommendations regarding account type."
Under the Nevada proposal, broker-dealers and sales representatives are subject to a fiduciary duty when providing investment advice. But there’s an Episodic Fiduciary Duty Exemption for BDs and reps that qualify.
The exemption states that their fiduciary duty ends after giving the advice. But reps cannot qualify for the exemption if they hold themselves out as any of the following: “advisor,” “adviser,” “financial planner,” “financial consultant,” “retirement consultant,” “retirement planner,” “wealth manager,” “counselor” or any other title the state deems appropriate.
More specifics are needed throughout the proposal, Stradley-Ronon lawyers say.
"The definition of 'investment advice' appears to go well beyond existing definitions and interpretations under federal law," they state. "For example, the definition refers to both 'advice' and 'recommendations' without explaining how the terms differ and how a recommendation can amount to advice.
"Moreover, seemingly any information about a specific security provided to a specific client could be deemed to constitute investment advice, even such general information as price and historical performance."
Roper echoed the need for more defined terminology in the proposal.
"Our one concern is that, like the SEC, it doesn’t define what it means by best interest, and it doesn’t include concrete restrictions on harmful incentives that conflict with that standard," she said. "We’ll be suggesting some improvements in those areas, but overall we are very supportive of what they have proposed."
Nevada does not make it a violation for advisors to sell proprietary products. They can sell a proprietary product if it’s in the client’s best interest, clients know it’s proprietary and they’re aware of the risks.
"The Proposal does not define the term 'risks' or the level of materiality triggering risk disclosure," Stradley-Ronon writes. "Broker-dealers may wish to have this condition clarified to provide that disclosure in a manner consistent with federal law would satisfy this condition."
Like the SEC rules, the Nevada proposal does not apply to insurance agents. The DOL rule applied to all who sold financial products with retirement funds.
Nevada is seeking comments on its proposal by March 1, 2019. Written comments can be sent to: Diana Foley, Nevada Secretary of State's Office Securities Division, 2250 Las Vegas Boulevard North, Suite 400, North Las Vegas, Nevada 89030.
The Standard Of Care
The Nevada proposal provides that the fiduciary duty is breached if the broker-dealer, investment adviser or their representatives, fails to adhere to the following conditions, as outlined by Stradley-Ronon:
A. Fail to perform adequate and reasonable due diligence on a product or investment strategy prior to transacting a sale or providing investment advice;
B. Recommend to a client a security or an investment strategy that is not in the client’s best interest, or the recommendation or sale deviates from firm policies, offering limitations or other law;
C. Provide investment advice on a product or investment strategy without understanding or conveying all risks or features of the product or investment strategy;
D. Put their own interest, other clients’ interests or the firm’s interest ahead of the client;
E. Fail to provide current offering documents on the product prior to execution of the transaction;
F. Fail to disclose that a recommended product was a proprietary product or that the advice was based upon a limited pool of products, or fail to convey all material risks or features of the product;
G. Fail to adequately disclose all information regarding a potential conflict of interest;
H. Fail to comply with best execution rules;
I. Recommend or sell a security without disclosure of a bad actor disqualification as defined in Regulation D, Rule 506;
J. Recommend or charge a fee that is unreasonable;
K. Violate an applicable FINRA rule or other applicable self-regulatory organization rule that relates to client communications or disclosures;
L. Engage in conduct prohibited by NAC 90.321, 90.327 or 90.328 (relating to fraudulent and unethical practices); or
M. Limit the availability of securities to certain clients unless based upon a client’s investment goals, a client’s investment strategy, a firm’s limitation of quantity or type of investment that can be sold to a client, or the security’s own sale limitations.
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.
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