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Industry Groups to Nevada: Let the SEC Govern Advisors

Advocates for brokerages and RIAs agree on one thing: The federal government—not the states—should be the one to set the standard of conduct.  

The Nevada Secretary of State Securities Division released its draft regulations for a fiduciary standard for broker/dealers and registered representatives in January, and many fiduciary advocates say it’s a higher bar than the Securities and Exchange Commission’s Regulation Best Interest (Reg BI). Final comments are due today, and industry trade groups, including the Financial Services Institute, Securities Industry and Financial Markets Association (SIFMA) and Investment Adviser Association (IAA) Submitted letters outlining concerns with the regulation. They all had a similar message: Let the Securities and Exchange Commission regulate this type of conduct.

The IAA said it was concerned the state would create an additional layer of regulation for SEC-registered advisors, who are already under a fiduciary standard in the Investment Advisers Act of 1940. In addition, the state rule would violate the National Securities Markets Improvement Act of 1996, which prohibits states from issuing major regulations affecting SEC advisors.

“For more than 20 years, federal law has prohibited states from adopting any rules, interpretations, or guidance that would have the effect of substantively regulating SEC-registered advisers,” said Karen Barr, president and CEO of IAA. “The IAA will engage with policymakers in any state that appears to be moving in that direction.”

The IAA suggests the rule should clearly state it does not apply to federally regulated investment advisors.

While SIFMA and FSI submitted their own individual comment letters, they also signed a joint letter with 10 other financial services trade associations, including the Alternative and Direct Investment Securities Association (ADISA), American Council of Life Insurers (ACLI), Institute for Portfolio Alternatives (IPA), Insured Retirement Institute (IRI), Money Management Institute (MMI), NAIFA-Nevada, National Association of Insurance and Financial Advisors (NAIFA), Nevada Bankers Association (NBA), Small Business Investor Alliance (SBIA) and Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce.

These groups say a uniform federal law regulating broker and advisor conduct makes more sense than a patchwork of state laws, which will cause confusion. Specifically, they call for Nevada to wait on the SEC to finalize its best interest rule, due later this year.

“The most reasonable approach to protect investors and avoid investor confusion is to allow the SEC—the primary federal securities regulatory agency—to promulgate a uniform, nationwide, heightened, best interest standard of conduct for broker-dealers,” SIFMA writes. “A state-by-state approach would result in an uneven patchwork of laws that would be duplicative of, different than, and/or in conflict with federal standards. It would also introduce a new level of investor confusion, which would undercut not only the new, uniform federal standard, but also the interest of investor protection generally.”

The joint letter also cites preemption issues, pointing to conflicts with the National Securities Markets Improvements Act, the Advisers Act, the Employee Retirement Income Security Act of 1974 (ERISA) and the Federal Arbitration Act.

Another concern raised by these groups was that the rule would likely accelerate the move to the fee-based model and could limit retail investors’ choice and access to “affordable advice.”

“We are concerned that the proposal fails to acknowledge the impact it will have on low- and middle-income Nevadan investors’ access to financial advice,” FSI writes. “There exists a large body of quantitative research and evidence that demonstrate the essential and constructive role played by independent broker/dealer firms in this market. Research from a variety of sources has shown that investors who work with financial advisors save more and are better prepared for their retirement.”

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