May 27, 2020

May 26, 2020

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Is Nevada's Broker-Dealer Fiduciary Standard Constitutional?

Recently, I wrote about the Nevada Secretary of State's proposal to adopt regulations implementing legislation that imposes a fiduciary standard on brokers.  See Nevada Secretary Of State Unveils Proposed Broker-Dealer Fiduciary Rules.  This rule proposal is the product of legislation, SB 383, that was enacted in 2017.  SB 83 prohibits broker-dealers and sales representatives from violating the fiduciary duty imposed by NRS 628A.020.  NRS 90.575(1).

Although brokers are generally subject to licensing both with the Securities and Exchange Commission and the states, Congress has imposed certain limitations on state authority.  In particular, Section 103 of the National Securities Markets Improvement Act of 1996 prohibits states from establishing books and records requirements that differ from, or are in addition to," the requirements established by the Securities Exchange Act of 1934.  Although neither SB 383 nor the proposed regulations expressly impose recordkeeping requirements, it may be argued that the create a de facto requirement because brokers will need to demonstrate compliance.  In an apparent attempt to forestall this argument, the Secretary of State's proposed rules provides:

"These regulations shall be inte,preted and applied in harmony with the Securities Exchange Act of 1934, as amended by the National Securities Market [sic] Improvement Act of 1996 relating to state regulation of broker-dealer's books and records."

The statute and proposed rules might also be challenged based on Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  That provision provides, among other things,

"the [Securities and Exchange] Commission may promulgate rules to provide that, with respect to a broker or dealer, when providing personalized investment advice about securities to a retail customer (and such other customers as the Commission may by rule provide), the standard of conduct for such broker or dealer with respect to such customer shall be the same as the standard of conduct applicable to an investment adviser under section 211 of the Investment Advisers Act of 1940."

Some brokers may argue that this language evidences Congressional intent to occupy the field of broker regulation insofar as the applicable standard of conduct.  

Stay tuned.

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...