Tuesday, June 27, 2017

Most Nevada Financial Planners Become Fiduciaries Per State Law on 7/1/2017

Overview. On July 1, 2017, nearly all of those providing financial planning services, or holding out as financial planners, to clients located in Nevada, or those investment advisers and registered representatives who are located in Nevada, become subject to fiduciary duties as defined by Nevada state law.

 The definition of "financial planner" is quite broad, as it applies both to:
    (1) those who advise others upon the investment of money or upon provision for income to be needed in the future;
    (2) any individual who holds himself or herself out as qualified to perform either of these functions.

However, as set forth below, insurance agents who provide "incidental" advice, and attorneys and CPAs, remain excluded from the definition of "financial planner."

This Law Will Spread to Additional States. This new law in Nevada is likely to be copied by several other states in the next few years. In the legislatures of several states, concerns exist regarding the Trump Administration's efforts to reverse the U.S. Department of Labor rule-making as to fiduciary, as well as the inaction of the SEC (since they were authorized in 2010 by the Dodd Frank Act) on the fiduciary issue.

Interaction with Federal Law. This is an additional obligation imposed upon broker dealers, RIA firms, and their representatives (registered representatives and investment adviser representatives). ERISA preempts state law, but only as to the duties applicable to ERISA-covered retirement plans. The DOL's rules as to IRA accounts do not provide for preemption, nor do the federal securities acts preempt Nevada state law.

"Financial Planner" Now Includes Broker-Dealers/Registered Representatives and Investment Advisers/Representatives. Since 1993 Nevada law defined a “financial planner” as "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." However, under prior law, the definition of "financial planner" excluded broker-dealers, sales representatives (i.e., registered representatives), and investment advisers. The 2017 legislation, now signed into law, eliminates these exemptions and thereby makes such persons subject to the provisions of existing law governing financial planners.

The Exclusions: Attorney, CPA, Insurance Agents Whose Advice is "Incidental." Still excluded from the definition of financial planners are attorneys and producers. Also excluded is "a producer of insurance licensed pursuant to chapter 683A of NRS or an insurance consultant licensed pursuant to chapter 683C of NRS, whose advice upon investment or provision of future income is incidental to the practice of his or her profession or business."

The Fiduciary Duty, Disclosure of Compensation, Duty to Know Client. The prior section of the statute describing the duties of a financial planner was not amended, and it provides: A financial planner has the duty of a fiduciary toward a client. A financial planner shall 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. A financial planner shall make diligent inquiry of each client to ascertain initially, and keep currently informed concerning, the client’s financial circumstances and obligations and the client’s present and anticipated obligations to and goals for his or her family.

Enforcement by the Securities Administrator. The new legislation enacts a provision to enable the Nevada Administrator of Securities "to enforce the fiduciary duty imposed on broker-dealers, sales representatives, investment advisers and representatives of investment advisers."

Enforcement by Private Right of Action. The section of the law providing for a civil remedy for clients was not changed, and provides: "Liability of financial planner.
      1. If loss results from following a financial planner’s advice under any of the circumstances listed in subsection 2, the client may recover from the financial planner in a civil action the amount of the economic loss and all costs of litigation and attorney’s fees.
      2. The circumstances giving rise to liability of a financial planner are that the financial planner:
         (a) Violated any element of his or her fiduciary duty;
         (b) Was grossly negligent in selecting the course of action advised, in the light of all the client’s circumstances known to the financial planner; or
         (c) Violated any law of this State in recommending the investment or service."

Rulemaking on Fiduciary Duty Authorized and Will be Closely Watched. The Nevada law also authorizes the Administrator of Securities "to adopt regulations defining or excluding acts, practices or courses of business as violations of that fiduciary duty and prescribing means to prevent violations of that fiduciary duty."

It is one thing to state that one is a fiduciary. It is another to then define the parameters of the fiduciary obligation. The rule making by the Administrator of Securities will be crucial in order to preserve a bona fide fiduciary standard upon financial planners in Nevada.

Other issues exist as to coverage of who is a "financial planner" under the statute. For example, is the term "Certified Financial Planner(tm)" or the acronym "CFP(r)" "holding out" as a financial planner. One could easily conclude that this is "holding out," under the plain language of the statute. Similarly, other designations and certifications using the terms "financial consultant" or similar terms might trigger application of the statute. There is increased interest in regulation of the use of titles. Hence, Nevada's rules in this area will be closely watched.

1 comment:

  1. This was a really good article about fiduciary responsibility and the consequences that can happen when you are a financial planner and that fiduciary responsibility is not followed. It will be interesting to see when the laws in Nevada that allow for civil remedy moves to other states. Thanks for sharing!


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