Thursday, January 24, 2019
We have big news in the regulation of investment advice space. Nevada just released its proposed regulations under the state's fiduciary duty statute. Comments are due on March 1, 2019. I broke the draft regulations down on Twitter when they came out and highlighted a few provisions:
Breaking news in the regulation of investment advice space!— Ben Edwards (@BenPEdwards) January 18, 2019
Nevada just introduced its draft regulations for the state fiduciary duty statute. The draft is available here: https://t.co/MQ7B60Ws8A
It's kind of a big deal.
Nevada's draft regulations differ from the SEC draft in significant ways. The draft Nevada regulations are substantially shorter coming in at eight pages against over a thousand pages from the SEC. They also catch more misconduct. Consider the SEC's proposed title restrictions. Although the SEC recognized that brokers calling themselves advisors/advisers has a tendency to mislead, the SEC only specifically targeted a few titles. The Nevada regulations go broader:
The regulations also prohibit misleading titles that dupe people into trusting when they really shouldn't. It makes clear that if you call yourself a financial adviser/advisor or anything like it, you have to act in a client's best interest. pic.twitter.com/oBgVfT6WGD— Ben Edwards (@BenPEdwards) January 18, 2019
Nevada also calls for brokers to explain how much they're getting paid when they make a recommendation. This is important because many people operate under the misconception that brokers give advice for free, perhaps as some sort of concierge service through an affiliated bank:
The proposed regulations have made a considerable splash with coverage from the Investment News, Wealth Management, Think Advisor and others. Although the regulations are stronger than anything proposed by the SEC, consumer groups are also calling for more, including a specific definition of the term "fiduciary duty" and an explicit requirement for brokerage firms to mitigate their conflicts of interest.
The move toward more state action comes as confidence in the SEC's proposed regulation best interest falters. Other states moving toward a state rule include New York, New Jersey, and Maryland. Barbara Roper, from the Consumer Federation of America framed the issue this way:
States see through the fake fiduciary standard the SEC proposed and are considering stronger measures. Industry groups brought this on themselves when they lobbied for a weak federal standard that doesn't protect investors or end abusive practices. https://t.co/f5e8ld37RB— Barbara Roper (@BarbaraRoper1) January 22, 2019
Nicole Boyson, a finance professor at Northeastern, also weighed in on the SEC's shortcomings:
My takeaway: Fiduciary rule is not even close to being sufficient to prevent misconduct. Dual registered advisers seem to be the worst offenders, by a mile, but all types misbehave. I'll soon be posting a new working paper of my own on this topic; stay tuned! 7/7 FIN.— Nicole Boyson (@nikir1) January 20, 2019
Ultimately, time will tell how this all shakes out. Although the industry will certainly challenge these regulations, I'm skeptical about their argument that the National Securities Markets Improvement Act somehow preempts state regulation on this front.