Brokers with Clients in Nevada on Red Alert
A quickly enacted amendment to a Nevada securities law that requires brokers to act as fiduciaries on all customer accounts is setting off industry alarm bells.
LPL Financial sent an update to its more than 14,000 “independent contractor” brokers on Friday about the amended law, which was enacted on June 2 and goes into effect on Saturday, July 1.
“[T]he unique challenges of this law are the extremely short implementation period coupled with a lack of specificity regarding an advisor’s obligations,” the memo said.
It warned brokers with offices or clients in Nevada, regardless of whether clients reside there, that they have an immediate obligation to disclose the compensation they and LPL could receive on solicited trades and recommendations, along with conflicts of interest.
“Although the commission may appear on the trade confirmation sent to the client, the new law requires disclosure at the time the advice is given,” the memo said.
In a sign of the unexpectedly swift passage of the amended law, LPL told brokers they must make the disclosures personally on sales initiated between July 1 through July 10, either by hand, by email or by referral to an LPL website. After July 10, LPL will handle the disclosure through statement messages and account opening paperwork.
Signed by Nevada Governor Brian Sandoval, a Republican, the amended law removes an exemption from being considered financial planners that brokers and advisers had enjoyed. The Nevada Securities Act requires planners to operate under a rigorous definition of fiduciary duty.
A major complication for brokerage firms is that Nevada’s state securities administrator has not yet issued regulations to help them comply with the statute.
“It’s awkward to apply a statute without the implementing rules,” said Andrew Hartnett, a former Missouri state securities commissioner who has written a short analysis of the Nevada statute.
Planners operating in Nevada must “make diligent inquiry” about a client’s financial condition and present and future goals, under the law, in addition to disclosing to the client “any gain the financial planner may receive, such as profit or commission, if the advice is followed,” according to the law.
In an additional challenge, the Nevada law requires financial planners to consider each client’s family obligations and how they might relate to the client’s investment objective and goals. “These discussions should be documented, particularly with respect to any financial goals for the client’s family, which may not necessarily be captured in the account application,” the LPL memo said.
In a particularly chilling feature for brokerage firms, Nevada partially exempts clients from having to submit to industry arbitrations if they have disagreements with firms or brokers.
Anyone who loses money because of a planner’s advice can recover “the amount of the economic loss and all costs of litigation and attorney’s fees,” LPL told brokers in a memo on the law sent earlier this week. Nevada’s move is “a sign of the times as state securities regulators continue to sharpen their focus in an effort to protect investors in their jurisdictions,” the memo said.
Other states are also reportedly pursuing passage of fiduciary rules.
Hartnett, a lawyer at Greensfelder, Hemker & Gale, P.C. in St. Louis, said he believes Nevada is the first state to have levied a statutory fiduciary obligation with regards to advice on all brokerage accounts, not just retirement accounts.
The new Department of Labor fiduciary rule that is still being modified applies only to retirement accounts.