Nevada Resumes Fiduciary Rule Rewrite

Broker-dealers and advisors doing business in the Silver State will want to pay attention to newly proposed regulations defining the state’s fiduciary standard, as well as broader changes to practices and procedures.  

Efforts by Nevada regulators to implement guidance defining the state’s fiduciary standard stalled roughly two years ago, but those efforts appear to be back on track. The Securities Division of the Nevada Secretary of State released a broad-based proposal June 30 to revise regulations under Chapter 90 of the Nevada Administrative Code dealing with securities, including updating the fiduciary standards, as well as incorporating several provisions under the North American Securities Administrators Association’s (NASAA) Model Rules. 

In 2019, the state’s Securities Division released a regulatory proposal to implement the 2017 law, which harmonized the activity of broker-dealers and RIAs, and gave the Nevada securities administrator authority to further define the fiduciary duty by defining certain acts as violations or exclusions from the duty and prescribing “means reasonably designed to prevent” violations of acts defined as a violation of the duty. The 2019 proposal, however, was never finalized and apparently was overtaken by other events, including the pandemic and industry opposition to the proposal. 

Conduct Unbecoming

Section 5 of the new proposed regulation seeks to establish the fiduciary duty of investment advisers, representatives of investment advisers and federal covered advisers and specifies conduct which violates the fiduciary duty. “A person who is an investment adviser, a representative of an investment adviser or a federal covered adviser is a fiduciary and has a duty to act primarily for the benefit of the clients of the investment adviser, representative of the investment adviser or federal covered adviser, as applicable,” the proposed guidance states.  

The new proposal includes a laundry list of items that would be in violation of the fiduciary portion of the rule, including the following scenarios.

• Recommending to the client the purchase, sale or exchange of any security without reasonable grounds to believe that the recommendation is suitable for the client on the basis of information furnished by the client
• Inducing trading in the account of a client that is excessive in size or frequency in view of the financial resources, investment objectives and character of the account in light of the fact that the investment adviser or a representative of the investment adviser in the situation can directly benefit from the number of securities transactions effected in the account of the client
• Placing an order to purchase or sell a security for the account of a client without authority
• Lending money to a client unless the investment adviser is a financial institution engaged in the business of loaning funds or the client is an affiliate of the investment adviser
• Misrepresenting to an advisory client or prospective advisory client the qualifications of the investment adviser or any employee of the investment adviser or the nature of the advisory services being offered or fees to be charged
• Charging a client an unreasonable advisory fee
• Failing to disclose to a client, in writing before rendering advice, any material conflict of interest relating to the investment adviser, or any of its employees, which could reasonably be expected to impair the rendering of unbiased and objective advice
• Making a guarantee to a client that a specific result will be achieved, regardless of whether the guarantee relates to a gain or loss
• Disclosing the identity, affairs or investments of a client unless required by law or the consent of the client is obtained by the investment adviser or a representative of the investment adviser
• Failing to establish, maintain and enforce written policies and procedures reasonably designed to prevent the misuse of material nonpublic information, contrary to the provisions of section 204A of the Investment Advisers Act of 1940

ERISA Preemption?

Like the draft regulatory proposal from 2019, the new version does not appear to include a clause providing an exemption for ERISA. In 2017, the ARA met with the Nevada regulators and submitted a comment letter contending that there are strong legal and policy arguments for exempting investment advisory services to ERISA-covered retirement plans and their participants and beneficiaries from the regulations. 

The letter argued, among other things, that any Nevada regulation of fiduciary advisory services to employer-sponsored retirement plans and their participants and beneficiaries would not only be preempted by ERISA, but that even if the “savings clause” in ERISA’s preemption provision were somehow interpreted to cover the Nevada regulation of these activities, it would still require the matter to be referred to federal court.

Additional Provisions

Additional items contained in the proposed regulations beyond the fiduciary section that would apply to broker dealers and advisers include: 

• making it unlawful and deemed to be a fraudulent, deceptive and manipulative act, practice and course of business for an investment adviser to have custody of client funds or securities unless certain criteria are met by the investment adviser;
• expanding the practices that constitute unethical or dishonest practices in relation to advertisements;
• establishing procedures for the electronic delivery of certain documents and the use of e-signatures;
• requiring an investment adviser to adopt policies and procedures relating to cybersecurity;
• establishing procedures governing the security and confidentiality of personal information; 
• adopting by reference certain rules of the Financial Industry Regulatory Authority; 
• requiring investment advisers to maintain various records, policies and procedures; 
• prohibiting broker-dealers from making or maintaining the registration of sales representatives in certain circumstances; 
• authorizing the delay of transactions or disbursements from certain accounts relating to older persons or vulnerable persons in certain circumstances; and 
• revising provisions relating to the exemption of persons from the licensing requirements of sales representatives. 

The Securities Division is requesting that interested parties submit written comments by Aug. 2, 2022, when it will also hold a “workshop” to solicit feedback on the proposed regulations.