Fiduciary Duty Rule by Scott L. Starr, Partner
Law 360’s Allison Noon recently published an article entitled “Facing Fiduciary Duty, Brokers Threaten to Exit Nevada” (included below). According to Ms. Noon: “Top stock brokerages are accusing Nevada regulators of playing a dangerous game with fiduciary rules and are threatening to leave the Silver State if officials don’t back off.”
Ms. Noon goes on to report that various Wall Street trade associations and brokers Morgan Stanley, Charles Schwab, Edward Jones, TDAmeritrade, and Wells Fargo “offered ominous promises that investment options would disappear in Nevada if Nevada’s security regulators adopted the fiduciary standard.”
This just goes to show how Wall Street does not really care very much about the mom and pop investors who choose to invest their hard earned life savings and retirement plans in various securities products.
That is because the “fiduciary duty rule” that Nevada regulators are wanting to adopt simply states that a broker selling securities in Nevada will have to put his client’s interests above his own. In other words, in making investment recommendations the broker needs to think more and be motivated by what is in his client’s best interest, as opposed to what is in the best interest of his own pocketbook. Pretty simple rule isn’t it? Most people would think that all brokers should put the wellbeing of their customers before their own bank accounts, but if they think that, in many states they would be wrong.
Fortunately for people who buy securities in Indiana, the appellate courts in this state have ruled that a stock broker is in fact a fiduciary to his clients. Nevertheless, brokerage firms, who once again care more about themselves, than their customers, frequently require their customers to sign arbitration agreements, which means that if the customer has a complaint he can’t sue the broker in court but instead has to go through FINRA arbitration, where the Wall Street attorneys will once again argue that the arbitrators can ignore the fiduciary duty standards laid down by the Indiana Court of Appeals and instead apply the more lax and lenient “suitability” standard. Sometimes arbitrators buy such rubbish, but most don’t. Nevertheless, this shows how Wall Street wants to keep the deck stacked in its favor.
If you or a loved one are the victim of securities fraud, have been lied to, or have lost your hard earned money in what your broker represented was a “safe” investment, call Starr Austen & Miller for a free, no obligation consultation. Starr Austen & Miller has represented over a thousand victims of securities fraud and knows how to protect your rights.
Facing Fiduciary Duty, Brokers Threaten To Exit Nevada
By Alison Noon of Law360.com
Top stock brokerages are accusing Nevada regulators of playing a dangerous game with fiduciary rules and are threatening to leave the Silver State if officials don’t back off.
Ramping up two years of rhetoric from Wall Street trade associations, Morgan Stanley warned that it would halt its brokerage services in Nevada entirely if the state adopts a rule raising professional standards for stockbrokers. Charles Schwab, Edward Jones, TD Ameritrade and Wells Fargo offered ominous promises that investment options would disappear.
In dozens of comment letters provided to Law360 on Friday, financial institutions claimed that a doomsday scenario would ensue if the Nevada secretary of state directs stockbrokers to act in clients’ best interests instead of their own, like investment advisers.
The letters signified the latest turn in the industry’s dance with officials in several states, which say they are tired of waiting for federal regulators to change the equation for brokers. Later this year, the U.S. Securities and Exchange Commission is expected to finalize a rule that was started in principle nearly a decade ago to raise the standards, but the so-called Regulation Best Interest does not go as far as some states would like.
The companies all begged Nevada securities officials to at least wait to see the SEC’s final rule before acting. If the state moves forward with its own regulation, they asked Nevada to exempt all companies dually registered as broker-dealers and investment advisers, which would include every major financial institution.
Pushing forward with the current, strict proposal — casting a broad fiduciary net on “investment advice” and offering few outs — could ultimately cost Nevada investors, they warned.
“Absent substantial changes to the proposal, Morgan Stanley will be unable to provide brokerage services to residents of the state of Nevada,” that company’s comment said.
Charles Schwab, Edward Jones, TD Ameritrade and Wells Fargo said the regulation would limit access to professional investment information and options in Nevada, signaling in more opaque terms that they would remove certain brokerage services. Charles Schwab, for instance, cited “dramatic changes” it will be forced to make.
The firms warned that whatever services remain would likely increase in cost. Wells Fargo said the proposal would “effectively eliminate the ability of Nevadans to receive competitively priced brokerage services from dually registered investment firms.”
The likelihood that the firms will act on their threats remains unclear. Attorneys who specialize in securities regulation said they have reason to doubt the sincerity of the messaging, but said a Nevada exodus was certainly within the realm of possibility.
Todd Cipperman of Cipperman Compliance Services LLC noted that officials at the Financial Industry Regulatory Authority are already enforcing a strict version of brokers’ current standard, requiring trades to be suited to clients, and there’s no telling how many states could follow Nevada.
“Firms that think they’re going to escape regulation, they’re mistaken,” Cipperman said.
He would not advise brokers to move based on regulatory schemes, saying business decisions should be based on business criteria, and questioned whether a firm that does leave Nevada could still service Nevada residents through another state.
“It’s not quite as straightforward as you might think,” Cipperman said. “You’re not selling hamburgers on the corner here. These are intangible services and products.”
All the brokerage companies either declined to comment or did not respond to messages seeking comment. A representative for the state declined to comment.
Consumer advocates offered resounding support for the proposal in their own comments to the Nevada Secretary of State Securities Division, saying they only wish the division had the authority to apply a fiduciary rule to insurance agents as well.
“The department’s proposal provides a model for how to extend a fiduciary standard to the broad array of services that investors reasonably rely on as fiduciary investment advice,” advocates said in one letter signed by 16 state and national consumer groups.
Consumer advocates said brokers sell and profit from their portfolios while making themselves out to be objective in the marketplace, misleading investors about their objectivity in order to make a commission.
The industry maintains that brokers and advisers are fundamentally different roles, deserving different duties of care.
States began eyeing fiduciary rules after the Trump administration stymied an Obama-era U.S. Department of Labor fiduciary rule for retirement plans in early 2017, then declined to appeal when the Fifth Circuit invalidated and vacated the measure in 2018.
The Securities Industry and Financial Markets Association has been lobbying against Nevada’s fiduciary rule since it was introduced in the statehouse in 2017. SIFMA argued in a letter dated March 1, the deadline for public comment, that the National Securities Markets Improvement Act of 1996 preempts Nevada’s proposal because the state rule would force brokers to keep more records than federal regulators require.
The North American Securities Administrators Association responded that such a broad preemption is an overreach.
State securities rules are preempted only to the extent that they explicitly conflict with federal law, which does not exist on the fiduciary subject, the association argued in a letter dated March 7, which missed the state deadline but was included among 55 comment letters provided in response to a public records request.
“The draft regulations are a valid exercise of state regulatory authority because it will not be impossible to comply both with the draft regulations and the federal securities laws nor do the draft regulations pose an obstacle to Congress’s objectives in the federal securities laws,” NASAA argued.
Consumer advocates argued that existing federal record-keeping requirements should provide enough of a paperwork trail for brokers to be able to prove they acted in a client’s best interest.
The consumer advocates pointed out that the SEC’s own proposal acknowledges that broker-dealers are already subject to fiduciary standards in some jurisdictions under common law. In California and Puerto Rico, attorneys told Law360, case law supports the heightened standard in certain, narrow scenarios.
That alone should disprove the industry’s preemption argument, the advocates said.
The team of investment fraud lawyers at Starr Austen & Miller LLP fights for the protection of investors and handles cases involving securities arbitration misrepresentation, overconcentration, broker fraud, negligence and breach of trust.