States Pushing Fiduciary Rule Standards (With Success)

By John Hilton

While industry attention remains laser-focused on the Department of Labor fiduciary efforts, states are sneaking into the regulation game with bold moves.

Nevada surprised industry insiders by quickly debating and passing Senate Bill 383 revising the Nevada Securities Act to stiffen the fiduciary standard.

The bill states that any “broker-dealer, sales representative, investment advisor or representative of an investment advisor shall not violate the fiduciary duty toward a client” imposed in a separate statute.

That separate statute imposes the “duty of a fiduciary” on all financial planners. Senate Bill 383 modifies the definition of “financial planner” to remove from the exclusion broker-dealers, their representatives, investment advisors and their representatives.

Introduced March 20, the bill sailed through the Nevada Assembly and Senate. Republican Gov. Brian Sandoval signed the measure June 2.

Other states, such as New York and California, are considering fiduciary statutes of their own.

“It is a significant potential threat” to the industry, said Erin M. Sweeney, a lawyer with Miller & Chevalier in Washington, D.C. “Some of the states, their view is, ‘I think we’re going to need to take action with our own hands.’”

Anti-fiduciary forces have spent considerable time, effort and money fighting the Department of Labor for two years over a rule it deems “unworkable.”

Phase One of the rule took effect June 9, with the more onerous disclosures a signed contract not applicable until Jan. 1, 2018. Opponents are optimistic at the moment as DOL Secretary Alexander Acosta is reviewing the rule and could make changes, or delay the Jan. 1 date further.

Letter to Acosta

While state legislators work the fiduciary issue, several state treasurers signed a June 7 letter to Acosta urging him to retain the fiduciary rule.

“The financial markets can be treacherous to navigate and the array of options is vast,” reads the letter signed by 13 state treasurers representing both parties. “Anything less than the complete implementation of the fiduciary rule would be akin to sending individual investors into those rough seas without a life jacket.”

The five-page letter is a mini issue paper full of data and citations. It likely also caught opponents off guard, Sweeney said.

“Whenever you have something like that coalescing, you have to pay attention,” she said. “I think some had thought maybe you’ll see California do something like this rather than the broader spectrum.”

If that wasn’t enough, the National Association of Insurance Commissioners formed a working group to examine the possibility of state regulators using key principles of the DOL fiduciary rule for annuity sales.

The states could lead efforts to establish “uniformity and consistency” for the sale of annuities, said Wisconsin Insurance Commissioner Ted Nickel, speaking at the Insured Retirement Institute conference in Washington this week.

The NAIC working group will study the language, among other aspects, of the DOL fiduciary rule standard, Nickel said. The timeline for its work is unknown.

Nevada Law

Nevada’s existing statute imposes two specific duties: First, financial planners must “disclose to a client, at the time advice is given, any gain the financial planner may receive, such as profit or commission, if the advice is followed.”

In addition, financial planners must “make diligent inquiry of each client,” at the beginning of the relationship and on an ongoing basis, to assess the client’s financial condition and present and future goals.

Under Senate Bill 383, which takes effect July 1, the Nevada securities administrator has authority to further define the fiduciary duty by defining certain acts as violations or exclusions from the duty.

The administrator may prescribe “means reasonably designed to prevent” violations of acts defined as a violation of the duty. Any rulemaking under this authority will only apply to broker-dealers, their representatives, investment adviseos and their representatives and not to any other financial planners.

Under Nevada law, investors may sue financial planners for “the economic loss and all costs of litigation and attorney’s fees” that result from following a financial planner’s advice where the planner violated the fiduciary duty, was “grossly negligent” in offering the financial advice, or otherwise violated Nevada law in “recommending the investment or service.”

Senate Bill 383 does not disturb the exclusions from the definition of financial planner for attorneys, CPAs, and insurance producers.

Under Nevada law, a 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.”

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].