The SEC proposal is being viewed as more of a cosmetic fix “which is why you see states like Nevada and Maryland proceeding with their own proposals,” he said.
Rules in both states are proceeding quickly and would give brokers, sales people and dually registered advisors almost no wiggle room to exempt themselves from taking on full fiduciary duties if they work with clients in Nevada or Maryland.
Nevada is moving quickly on its proposed regulations, giving the industry until Friday to comment. “The proposed rule applies a fiduciary duty and defines investment advice, which is the linchpin upon which the proposal is built,” said Holly H. Smith, a partner with Eversheds Sutherland.
The rule would make it difficult for brokers to rely on episodic exemptions from the Nevada fiduciary rule. Firms now use such exemptions at the federal level to sidestep fiduciary standards. In contrast, in Nevada an episodic exemption “is not something you can claim and be safely within a safe harbor,” Smith said. “It can be revoked later if it turns out you weren’t applying it properly.”
Providing advice on fee options, the kind of account a client should open, a limited list of investments or even referrals to other financial professionals would all open advisors up to the fiduciary standard.
At the same time, the Nevada rule prohibits charging a fee that is “unreasonable” without defining what is or isn’t unreasonable in the proposal, Smith said.
The Nevada proposal would also give investors a private right of action to sue advisors for breach of fiduciary duty, among other offenses.
“This should be on everyone’s radar at this point. The client can recover the amount of loss, all costs of litigation and fees,” Smith said.
Maryland fiduciary legislation is also moving quickly, with hearings scheduled on the “Financial Consumer Protection Act” for March 12 and 13.
The legislation extends a fiduciary standard to broker-dealers, broker-dealer reps, insurance agents, investment advisors, advisor reps and federally covered advisors. “When providing advice, these persons would be required to act in the best interest of customers,” said Bria M. Adams, an associate with Eversheds Sutherland.