Recently-Enacted State-Level Legislation Imposes New Obligations on Financial Institutions, Investment Advisers and Service Providers to 403(b) Plans
Legislation recently enacted by two states obligates financial institutions and investment advisers, as well as service providers to non-ERISA 403(b) plans, to meet new compliance requirements. Specifically, Nevada has enacted legislation that imposes a fiduciary duty on financial institutions and investment advisers rendering investment advice to Nevada-based clients. Similarly, the Connecticut legislature has passed a bill requiring service providers for 403(b) plans not covered by ERISA to disclose conflicts-of-interest to a plan's fiduciaries.
Nevada legislation. Financial institutions and investment advisers operating in Nevada recently became subject to a new state-imposed fiduciary duty. This duty stems from legislation (Senate Bill 383, or "SB 383") signed by Nevada Governor Brian Sandoval on June 2, 2017. SB 383 amended the Nevada Securities Act, effective as of July 1, 2017, to remove an exclusion for financial institutions, investment advisers, and their representatives from the definition of "financial planner." Consequently, if these parties provide advice to Nevada-based clients, whether retirement or wealth management, they will be subject to a state-mandated fiduciary duty. Advice provided to retirement accounts that are subject to ERISA may be exempt from the new Nevada rule, as ERISA generally preempts state law, but it will apply to ERISA-exempt 403(b) plans. On the other hand, states have broad authority to regulate the professions, and much of what brokers and financial planners do is in the securities law arena, where state requirements might not be found to be preempted by ERISA.
Under Nevada law, a financial planner is a person who, "for compensation," provides advice regarding the investment of money or the provision for income needed in the future, or who holds himself or herself out as being qualified to perform either of those functions. Nevada law further provides that investors may sue financial planners for economic losses (and all costs of litigation and attorneys' fees) that result from following the financial planner's investment advice if the planner: (i) violated an element of his fiduciary duty; (ii) was grossly negligent in offering investment advice (taking into account the client's investment goals and financial circumstances); or (iii) otherwise violated Nevada law in recommending the investment or service at issue.
To be sure, SB 383 only imposes a fiduciary duty in the context of advice provided by financial institutions and investment advisers to Nevada-based clients. It is important to note, however, that the state-level fiduciary duty created by SB 383 is in addition to any fiduciary duties imposed on financial institutions and investment advisers under federal law.
While the fiduciary duty imposed by SB 383 has yet to be defined and is subject to future state rulemaking, it would appear to require: (i) disclosure of compensation at account opening; (ii) continual monitoring of investment strategies and products suggested by financial institutions and investment advisers in view of their clients' financial condition; and (iii) liability for financial institutions and investment advisers breaching their fiduciary duty.
The Nevada legislation is available by clicking here.
Four states (California, Missouri, South Dakota and South Carolina) already impose a fiduciary duty on financial institutions, and the trend is for increased state involvement on this issue based on the belief that it will provide more protection for consumers of investment advice than afforded at the federal level. As discussed below, Connecticut provides another example of a recent state initiative.
Connecticut law. Effective October 1, 2017, and beginning on or after January 1, 2019, any company that administers a non-ERISA 403(b) plan offered by a political subdivision of the state of Connecticut to the employees of such political subdivision, must disclose to each plan participant any conflict-of-interest that the person has with the plan. The disclosure must be made upon the participant's initial enrollment in the retirement plan and at least annually thereafter. In addition, the disclosure must include: (i) the fee ratio and return, net of fees, for each investment under the retirement plan; and (ii) the fees paid to any person who, for compensation, engages in the business of providing investment advice to participants in the retirement plan either directly or through publications or writings.
Note that non-ERISA 403(b) plans are not subject to the Department of Labor's Fiduciary Rule, but could be subject to the Internal Revenue Code rules and the BIC Exemption. Moreover, non-ERISA plans have traditionally allowed for individual contracts between annuity providers and individuals.
The Connecticut law is available by clicking here.