The proposal, which is openfor comment until March 1, is more expansive than industryobservers were expecting, said Fred Reish, chair of Drinker, Biddle& Reath's ERISA and retirement income team. (Photo:Shutterstock)

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Securities brokers and insurance agents who felt mostthreatened by the Department of Labor's fiduciary rule — and most relieved when it wasvacated in the Fifth Circuit Court of Appealslast year — are again finding themselves looking over theirshoulder, at least in the state of Nevada.

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In 2017, Brian Sandoval, Nevada's then Republican governor and aformer federal judge, signed a law passed by the state's Democraticlegislature requiring a fiduciary standard for brokers.

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The proposed parameters of the new rule were released January18, more than a year and a half after the law was passed.

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The proposal, which is open for comment until March 1, is moreexpansive than industry observers were expecting, said Fred Reish,chair of Drinker, Biddle & Reath's ERISA and retirement incometeam.

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Like Labor's vacated fiduciary rule, Nevada's proposal includesa new private right of action, allowing investors to sue forallegations of fiduciary breach.

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The Securities and Exchange Commission's proposedRegulation Best Interest, which is designed toraise brokers' existing suitability standard for investmentrecommendations to retail investors, does not include a privateright of action. Under that rule, the SEC andFINRA would enforce breaches.

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“That single thing will make the Nevada rule much more impactfulthan Reg BI,” said Reish in a recent webinar.

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Nevada hosts 174 FINRA-registered firms with 1,278 branches.

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The state's proposal applies a broad definition of investmentadvice, and offers only narrow exemptions for activities that wouldfall outside the realm of fiduciary advice, attorneys with DrinkerBiddle said.

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Dually registered brokers are treated as RIAs under the rule,and cannot avail themselves of exemptions, another major way Nevadais deviating from the SEC's Reg BI.

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“This is the opening salvo in what is going to be a much broaderwar,” said Brad Campbell, a partner at Drinker Biddle and formerhead of Labor's Employee Benefits Security Administration in theBush Administration.

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New Jersey is prepping a proposed fiduciary rule; New York has issued regulations for sales ofannuities. A number of states are considering following suit, saidCampbell, who, along with others in industry, fears the“Balkanization” of securities regulations, whereby practitionerswill be subject to a patchwork of different standards across statelines.

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From his experience having overseen the drafting of regulationsat the federal level, Campbell suggested Nevada's proposal,produced by the Securities Division of Nevada's Secretary of State,leaves plenty to be desired.

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“I am not impressed with the quality of the drafting in thisproposal,” he said matter-of-factly. “It doesn't look like theproduct of 14 months of deep thought.”

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Here a few highlights of the proposal:

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1.  These broker-dealer or sales repactivities would constitute fiduciary advice under the followingtime periods:

  • Providing investment advice;
  • executing discretionary trading;
  • maintaining AUM; acting in a fiduciary capacity to theclient;
  • periods in which fees or gains are disclosed; through thecompletion of contracts;
  • through the term of engagement of services.

2. No dual-registrant backdoor:

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“Any investment adviser who also acts as a broker-dealer,whether through the same entity or related entity, and anyrepresentative of an investment adviser who also acts as a salesrepresentative, is presumed to be acting in their capacity as aninvestment adviser or representative of an investment adviser.”

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Dually registered brokers will not be able to rely on theproposed rule's exemption for the ongoing monitoring ofinvestments.

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3.  Investment advice includes, but isnot limited, to the following:

  • advice or recommendation to buy, sell, or hold a security
  • advice or recommendation on the value of a security
  • providing an analysis or report of a security
  • monitoring an account for the purpose of recommending a buy,sell, or hold of a security
  • advice or recommendation on the type of account a client shouldopen
  • advice or recommendation on fee options available to aclient
  • providing information on a personal investing strategy
  • providing a financial plan if it included buying, selling, orholding a security
  • providing a limited list of securities available forpurchase
  • providing information on a security not listed in offeringdocuments
  • recommending a broker-dealer, adviser, or other investmentservice provider
  • providing advice or a recommendation on an insuranceproduct

4. What is not fiduciary investment advice:

  • providing an investment strategy to the general public
  • publishing an investment company ranking or a bond mutual fundvolatility rating ranking consistent with FINRA rules

5. Exemptions to fiduciary standard:

  • executing an unsolicited transaction for a client whose assetsare not managed by the broker-dealer
  • a broker-dealer executing a trade in good faith that wasrecommended to a client by another registered fiduciaryadviser
  • clearing firms executing trades at the direction ofbroker-dealers

6. Episodic Fiduciary Duty Exemption:

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Under the exemption, a broker-dealer has a fiduciary dutyrelated to specific advice given to a client, but does not have anongoing duty to monitor the investment if:

  • the broker-dealer does not manage the client's assets
  • the broker-dealer does not create periodic financial plans forthe client
  • does not perform discretionary trading for the client
  • does not have a previous or concurrent fiduciary relationshipwith the client
  • the client does not reasonably expect ongoing advice
  • the client solicited the investment advice

7. No escape hatch via titling:

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A broker-dealer holding themselves out under the followingtitles does not limit their fiduciary duty and cannot rely on theEpisodic Fiduciary Duty Exemption:

  • adviser; advisor
  • financial planner; financial consultant
  • retirement consultant; retirement planner
  • wealth manager
  • counselor
  • or other titles the Administrator of the rule may deeminappropriate

8. Propriety products:

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Sales of propriety products do not in and of themselvesconstitute a fiduciary breach, so long as the client is advisedthat the product is proprietary and on all of the risks associatedwith the product.

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