Broker Dealer | Fiduciary | Investment Advisers | State News

Massachusetts Securities Chief Finds Reg BI Lame and Creates Stricter Fiduciary Standards for Bay State Residents

The Massachusetts Securities Division (“MSD”) is moving ahead with its proposed uniform fiduciary standard of conduct for both broker-dealers and investment advisers (“MA Rule”, or “Fiduciary Conduct Standard”).  Secretary of the Commonwealth, William Galvin, signed off on new regulations that impose a fiduciary duty more stringent than the federal standards set forth in Regulation Best Interest (“Reg BI”).  Galvin supports the new standards since, as he views it, “the SEC has failed to provide investors with the protections they need against conflicts of interest in the financial industry with its ‘Regulation Best Interest’ Rule”.  The MDS announced a public hearing to discuss the proposed Fiduciary Conduct Standard for Tuesday, January 7, 2020.  Advisers and broker-dealers can also send written comments on the proposed regulations by Tuesday, January 7, 2020 at 5 p.m.  Email comments or submissions of scanned comment letters attached to an email may be submitted to securitiesregs-comments@sec.state.ma.us.

The new standard of conduct will apply to federally covered advisers and FINRA registered broker-dealers, as well as state registrants.  More specifically:

  1. The MA Rule applies to federally registered investment advisers and broker-dealers who have, or who are prospecting for, clients in Massachusetts.
  2. The MA Rule also covers agents, investment adviser representatives, and Massachusetts state registered investment advisers (collectively, with broker-dealers and federally covered investment advisers, “Registrants”).
  3. The MA Rule requires that a conflict of interest be fully mitigated or eliminated in order to demonstrate the duty of loyalty. This is different from the duty of loyalty standard described by the SEC’s Interpretation Regarding Standard of Conduct for Investment Advisers, which gives advisers the choice to either eliminate conflicts or provide detailed, full and fair disclosure to clients.  (See our blog post for more on this interpretation.)
  4. The MA Rule could create state regulation “contagion” in the fiduciary duty space. Nevada and New Jersey already have their own rule proposals pending.  It is possible that other states will follow suit.

If this rule passes, it will have a significant effect on broker-dealers and investment advisers serving Massachusetts clients since it is broader in scope than Reg BI.  The proposed rule:

  • Applies to conduct for recommending investment strategies and trades, providing investment advice, IRA rollovers and the transfer of assets, the selection of account types, and the purchase, sale or exchange of any security, commodity, or insurance product.
  • Requires ongoing monitoring of accounts by Registrants when a Massachusetts client would “reasonably expect” monitoring.
  • Deems non-compliance with the MA Rule to be a fraudulent practice and/or a dishonest or unethical practice.
  • Contains sanctions for committing fraudulent, dishonest, or unethical practices ranging from license revocation or denial in MA, to a bar or suspension. Further sanctions include monetary fines.  The commission of a fraudulent practice would constitute “bad boy” history and require disclosure.
  • Eliminates any sales contest, implied or express sales quotas, and other sales incentive programs.

The MA Rule, if passed, will place enforcement of fiduciary duty squarely into the jurisdiction of a state securities regulator and will impose a more stringent standard of conduct on Registrants.  The rule would allow MSD to bring regulatory action against a Registrant as a result of a fiduciary breach to a Massachusetts client; no harm or damage would need to be proved.

Hardin Compliance is closely monitoring this development and will provide additional updates and analysis as they become available.

Photo by Sebastian Pichler on Unsplash.

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