Back in mid-June, the Massachusetts Securities Division of the Office of the Secretary of the Commonwealth issued a preliminary solicitation of public comments with respect to new fiduciary conduct standards proposed for broker/dealers, registered agents/reps and investment advisers.
The proposal technically would make significant amendments to state rules known as “950 CMR 12.204” and “950 CMR 12.205,” while adding a new proposed rule “950 CMR 12.207.” Broadly speaking, the proposal would apply require these parties to adhere to a fiduciary conduct standard when dealing with their customers and clients.
Two months after the proposal first surfaced, industry groups have begun to weigh in with their questions and comments, including the Financial Services Institute (FSI) and the Insured Retirement Institute (IRI). Echoing comments submitted to New Jersey regulators regarding that state’s pending fiduciary rule expansion, the FSI and IRI say the state-based rulemaking will interfere with the U.S. Securities and Exchange Commission’s (SEC) Regulation Best Interest.
Advocates for the Massachusetts and New Jersey proposals, for their part, say the state-based proposals will be far more effective in tamping down on advisory industry conflicts of interest, based on the fact that the state-based proposals go much further to actually prohibit conflicted advice, whereas the SEC’s approach merely requires disclosure of conflicts by brokers. Advisers, under both the SEC rule and the state-based proposals, are required to act in a genuine fiduciary capacity.
“Regulation Best Interest achieves many of the goals set forth in the Massachusetts Securities Division’s proposal,” writes Robin Traxler, senior vice president for policy and deputy general counsel for the FSI. “Namely, a broker-dealer: (i) must provide a description of its applicable standard of conduct using prescribed wording; and (ii) must not place its own interests ahead of its customers’ interests. In addition, Regulation Best Interest provides a framework for disclosure which ensures that retail investors are informed of all material facts about: (i) the scope and terms of their relationship with a broker-dealer (i.e., that the firm or representative is acting in a broker-dealer capacity); (ii) fees and costs; and (iii) conflicts of interest.”
FSI argues that the Massachusetts proposal will unacceptable damage investor choice.
“Regulation Best Interest maintains the meaningful distinctions between brokerage services and advisory services, which preserve investor choice and access to investment products, services and advice,” the comment letter states. “Regulation Best Interest generally imposes more specific obligations on broker/dealers than the principles-based requirements of investment advisers’ common law fiduciary duty. Additionally, Form CRS provides investors with meaningful and effective disclosures relating to broker/dealers and investment advisers. For these reasons, FSI members believe that the Proposal would unnecessarily duplicate and potentially conflict with the requirements of Regulation Best Interest.”
In its comment letter, the IRI shares a similar perspective, calling the Massachusetts proposal “misguided.”
IRI says that Massachusetts should delay action on the proposed rule until it can identify whether new federal regulations leave any gaps in investor protections, most notable the Regulation Best Interest. IRI also says that while both Massachusetts and the SEC have the same goals, the Massachusetts proposal is inconsistent and incompatible with the SEC rules.
“For the division to create a separate regulatory structure that destroys the distinction between brokerage and advisory services is, at its best, misguided and, at worst, contrary and incompatible with the SEC rules,” writes Jason Berkowitz, chief legal and regulatory affairs officer at IRI. “By rejecting the SEC’s approach, the division threatens to create a regulatory labyrinth for broker/dealers offering services in Massachusetts. Broker/dealers will not only have to comply with the final SEC rules but also the Division’s more expansive and inconsistent rules.”
In particular, Berkowitz maintains, the proposal’s duty of loyalty creates “an impossible standard” for B/Ds and is “among the most problematic and unworkable aspects of the proposal.”
“We continue to believe federal law preempts Massachusetts’s authority to adopt the proposal,” Berkowitz adds. “Allowing each state to promulgate separate and potentially inconsistent standards for broker/dealers would create a patchwork regulatory structure that would be detrimental to investors and to the industry.”