ON June 17, the governor of Nevada signed into law a bill
that requires advisers to be subject to a fiduciary standard under that state’s law. The law became effective on
July 1 and comes on the heels of the Department of Labor
(DOL)’s implementation of its final regulation redefining
“investment advice.” The Nevada law raises important
conflict of laws and federal pre-emption issues, the former
being a procedural dilemma calling for a court to sort out
conflicting applicable laws of different jurisdictions, and
the latter being the problem of whether, in this instance,
federal law overrides the state’s. It also likely will impose
additional compliance burdens on advisers who operate in
Nevada. Further, the steps taken by the state beg the question whether other states will also try to impose a fiduciary standard on advisers.
Prior Nevada law required that “financial planners” be
subject to a fiduciary standard. However, it excluded most
broker/dealers (B/Ds), sales representatives and investment
advisers. With the enactment of the new law, these exclu-
sions have been removed from the statute. Therefore, a
broker/dealer, sales representative or investment adviser is
a “financial planner” if it “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.”
In other words, most advisers will be financial plan-
ners and subject to state law requirements even if the
adviser is already subject to the Securities Exchange Act of
1934, Advisers Act of 1940, Employee Retirement Income
Security Act of 1974 (ERISA), Internal Revenue Code of
1986 (IRC), and the regulations promulgated thereunder.
Nevada law requires that he be subject to a fiduciary stan-
dard and requires that the adviser: 1) at the time advice is
given, disclose any gain he will receive if advice is followed,
and 2) “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.” The statute provides that the adviser
is responsible for “the amount of the economic loss and
all costs of litigation and attorney’s fees” resulting from a
violation of his or her fiduciary duty, gross negligence or
violation of Nevada law.
Nevada’s new requirements may prove challenging for
firms with advisers in multiple states including Nevada.
Such firms will have to properly identify those advisers
who provide investment advice in Nevada and then possibly
apply a compliance program that is different than that
which would be applied in other states or under federal law.
Firms that provide advice over the internet or by similar
means—e.g., robo-advisers—may face even greater chal-
lenges because it may be difficult to identify when invest-
ment advice is provided in Nevada.
Further, firms and their advisers are subject to financial
liability under Nevada law. Advisers need to consider whether
they will provide services to clients in Nevada under these
circumstances and, if so, how they will comply while still
meeting the state’s obligations
under Securities and Exchange
Commission (SEC) and Depart-
ment of Labor regulations.
There is more to come.
The Nevada securities divi-
sion of the office of the secre-
tary of state is authorized to
issue regulations defining
or excluding an “act, prac-
tice or course of business” of
an adviser as a violation of a fiduciary act. Therefore, the
Nevada securities administrator could use her authority
to better align the Nevada law with federal law, although
whether she will do so remains to be seen. Moreover, there
are questions whether the statute is pre-empted by federal
law and thus not applicable, in whole or in part, to at least
The larger question here is whether other states will
follow Nevada’s lead. This outcome certainly is conceivable
as some may attempt to conform to the DOL’s recent investment advice regulation, create a uniform fiduciary standard applicable to broker/dealers and investment advisers
doing business in their states, or fill perceived gaps in
federal law. Indeed, PLANADVISER.com reported on July 3
that Connecticut passed a law requiring service providers
to non-ERISA 403(b) plans to provide disclosures similar to
whose required under Section 408(b)( 2) of ERISA. If other
states move in this direction, advisers could face a perfect
storm of compliance with multiple federal laws and the
laws of multiple states.
Nevada’s New Standard
Might other states apply this fiduciary guideline to advisers?
David Kaleda is a principal in the fiduciary responsibility practice
group at Groom Law Group, Chartered, in Washington, D.C. He has
an extensive background in the financial services sector. His range of
experience includes handling fiduciary matters affecting investment
managers, advisers, broker/dealers, insurers, banks and service
providers. He served on the Department of Labor ERISA Advisory
Council from 2012 through 2014.
Art by Tim Bower
laws ... issues.