Comments on Proposed Regulation Amending Chapter 90 of the Nevada Administrative Code to Add New and Expanded Fiduciary Duties for Financial Planners

March 1, 2019

Diana J. Foley
Securities Consultant,
Securities Division,
Nevada Secretary of State’s Office
2250 Las Vegas Boulevard North
Suite 400
North Las Vegas, NV 89030

Submitted Electronically – fiduciaryduty@sos.nv.gov 

Re:  Comments on Proposed Regulation Amending Chapter 90 of the Nevada Administrative Code to Add New and Expanded Fiduciary Duties for Financial Planners 


Consultant Foley:

The Association for Advanced Life Underwriting (“AALU”) appreciates the opportunity to comment on the proposed regulation (“the Proposal”) expanding and redefining the fiduciary duties of financial planners to be added to Chapter 90 of the Nevada Administrative Code.  The Proposal results from revisions made by Senate Bill 383 (“SB 383”) to the Nevada Revised Statutes Chapters 90 and 628A.

While we appreciate that the passage of SB 383 in 2017 may require some changes to Nevada securities regulations to implement the expanded definition of financial planner created by the new law, we are concerned that the Proposal goes beyond the legislative intent and mandate of SB 383.  In addition to creating an entirely new structure of fiduciary regulation that was not addressed during the debate surrounding the passage of SB 383 and is not seemingly necessary for its implementation, the Proposal appears to regulate aspects of the sale of insurance and the conduct of insurance producers.  As insurance regulation is the purview of the Nevada Division of Insurance (“Nevada DOI”), and outside the jurisdiction of the Securities Division (the “Division”), we believe the Proposal should be modified in several material respects.

Accordingly, we respectfully submit these comments for your consideration, and would appreciate the opportunity to discuss them with you.

Who We Are

AALU is the leading organization of life insurance professionals—our more than 4,000 members nationwide are primarily producers engaged in providing life insurance planning and annuity solutions for individuals, families, and businesses nationwide.  As life insurance professionals, we work in the best interest of our clients every day, enabling individuals and families from all economic brackets to maintain independence in the face of potential financial catastrophe, and to build and guarantee retirement income.  In 2017, the Life Insurance/Annuities segment of the Nevada insurance marketplace represented nearly $4.4 billion in written premiums.[1]  Our members operating in Nevada played a critical role in this process, working diligently to assist their Nevada clients in making informed insurance decisions to meet their financial needs and to provide critical financial and retirement security.

Overview

We share the Division’s goal of ensuring consumers have access to quality financial assistance.  However, as we explain in more detail below, we believe the Proposal needs significant revision in the following areas:

  • The Proposal Should Not Regulate Insurance;
  • The Proposal Should Expressly Exclude Insurance Producers from the Fiduciary Standard;
  • The Division Should Reduce the Scope of the Proposal to Not Exceed the Legislative Intent of the Statute; and
  • The Division Should Coordinate with the SEC to Avoid Conflicting Federal and State Standards.

Absent these important changes, we believe the Proposal is likely to increase the costs of financial assistance for Nevadans, and to reduce the availability of financial assistance and advice.  The Division should take care to preserve the different business models that best serve the different needs of Nevada’s consumer—commission-based provision of advice is an essential and cost-effective way to deliver many financial services, especially those that are by their nature related to a particular, point-in-time transaction.

The Proposal Should Not Regulate Insurance

The Proposal appears to regulate insurance sales that are outside of the jurisdiction of the Division.  When a licensed producer recommends an insurance product that is not a security, the Proposal—or indeed, any other regulation promulgated by the Division—does not apply.  The Nevada DOI regulates the sale of insurance products, and the Proposal should be amended accordingly.  Specifically, Sec. 4.1.(l) of the Proposal defines fiduciary investment advice to include “advice or a recommendation regarding an insurance product…by comparison to a security…[emphasis added]”  Merely comparing an insurance or annuity product to a security—when that insurance product is not itself a security—cannot confer jurisdiction on a securities regulator over an insurance transaction.  For example, a producer might explain the costs and benefits of an annuity or life insurance policy, and in doing so make some comparisons to dividend-producing investments or bonds to illustrate the effect of income guarantees or differences in taxation.  This is normal and appropriate conduct regulated by the standards imposed by the Nevada DOI on producers—it is not advice regarding securities.  We urge the Division to strike Sec. 4.1.(l), or to limit its application to recommendations of securities.

The Proposal Should Expressly Exclude Insurance Producers from the Fiduciary Standard

While the purpose of SB 383 was to expand the definition of financial planner to include broker dealers and sales representatives, it was not intended to include producers or other sellers of non-security insurance products, who are already regulated separately by the Nevada DOI.  To eliminate any confusion, such as that created by the reference to insurance discussed above, and to prevent frivolous litigation under the Proposal’s expanded definition of fiduciary conduct, the Division should use its regulatory authority under to the proposal to exclude insurance producers selling non-security insurance products from the scope of the rule.  This is necessary because producers may also be licensed as sales representatives of broker-dealers or registered investment advisors—non-security insurance transactions executed in their capacity as insurance agents, brokers, or producers should not be subject to the fiduciary rule.

Specifically, we suggest two amendments.  First, the addition of a new Sec. 5.5. to read as follows (new text italicized):

“Sec. 5.  Exemptions to Fiduciary Duty Standard. (NRS 90.575)

  1. A licensed insurance agent, broker or producer that provides information or recommends an insurance product that is not also a security is exempt from the fiduciary rule for that transaction.”

Second, we recommendation a modification to the presumption of fiduciary status applicable to broker dealers and sales representatives in Sec. 9, to read as follows (new text italicized):

Sec. 9. Presumption/Burdens (NRS 90.57, NRS 90.690)  A broker-dealer and sales representative shall be presumed to owe a fiduciary duty to the client, except when discussing or recommending an insurance product that is not a security.  The broker-dealer and sales representative have the burden of proving, in an arbitration, civil or administrative hearing, that an exemption to the fiduciary duty exists.”

The Division Should Narrow the Scope of the Proposal to Its Original Intent

While SB 383 was intended to expand the types of financial professionals subject to Nevada’s existing fiduciary standard, it was not intended to change the fiduciary standard itself.  The law adds broker-dealers, registered investment advisors, and sales representatives to the definition of financial planner.  The bill was not intended to authorize a new, comprehensive and greatly expanded fiduciary standard, but only to expand the applicability of the existing fiduciary standard.

The legislative history of SB 383 makes it clear that the bill was not intended to create a new fiduciary regime.  Sen. Aaron Ford, the sponsor of SB 383, testified before the Senate Committee on Commerce, Labor and Energy that the bill “…revises the definition of ‘financial planner’ to remove the exclusions for broker-dealer and investment advisers, thereby making such persons subject to existing law…”[2]  When asked whether this expanded definition would sweep in real estate recommendations, Sen. Ford reiterated the narrow purpose of the bill, stating “The definition is not expanding beyond what is already being considered for a financial planner.  It is removing the exemption for broker-dealers and investment advisers…anyone giving investment advice under the current provisions of [the law] as financial planners and now broker-dealers and investment advisers are going to be required to comply…”[3]

We urge the Division to reduce the scope of the Proposal to its actual legislative intent—to add certain financial professionals to the existing fiduciary standard, not to create a new fiduciary standard that includes insurance professionals selling traditional insurance products.

The Division Should Coordinate with the SEC to Avoid Conflicting State and Federal Standards

Nevada residents will not be well-served by conflicting State and Federal standards. The Securities and Exchange Commission (“SEC”) is expected to issue in the next several months final regulations addressing the fiduciary obligations of registered investment advisors and requiring best interest recommendations from broker-dealers.  By acting unilaterally before these rules are finalized, the Division makes it very likely that simultaneously applicable State and Federal rules will conflict with one another, reducing access to financial professionals and increasing costs for Nevadans seeking assistance.  This outcome can be avoided by waiting for the SEC to finish its work and revising the Proposal to coordinate with the new Federal Rules.  If the Division continues to move forward without coordinating with the SEC, the result is likely to be unnecessary confusion, cost, and delay.  Given the common goals of the SEC and the Division to protect investors and consumers, coordinating regulatory efforts is in the best interest of Nevadans.

Conclusion

Our members act in the best interest of the families they serve every day.  However, we are very concerned the best interest of consumers will not be served by the Proposal as written.  The Division should take care to exclude insurance producers regulated by the Nevada DOI from its securities-based rules, and ensure that a final rule is consistent with the legislative intent of the statute the Proposal seeks to implement.  A more tailored approach that limits the Proposal to the original goals of the Legislature; that fully coordinates with the SEC and other regulators; and that respects the appropriate jurisdiction of insurance and securities regulators will best serve the people of Nevada.

We appreciate the opportunity to comment, and appreciate your consideration of our concerns. We are always happy to answer any questions.

Sincerely,

Marc Cadin
Chief Executive Officer
Association of Advanced Life Underwriting


Notes

[1] “2019 Insurance Market Report for the 80th Legislative Session,” Nevada Division of Insurance, pg. 6.

[2] Minutes of the Senate Committee on Commerce, Labor and Energy, Seventy-Ninth Session, April 12, 2017, pgs. 3-4.

[3] Committee Minutes at pgs. 9-10.