© 2019 SourceMedia. All rights reserved.

Massachusetts readies fiduciary rule where SEC wouldn’t

Massachusetts proposed its own fiduciary rule, joining the ranks of state regulators seeking to impose a higher standard of care on brokers and advisors.

It’s also a sign that the SEC’s recently passed Regulation Best Interest — which is not a fiduciary standard — hasn’t quelled state regulators and consumer advocates’ ardor for tougher investor protections.

Massachusetts’ entry into the fiduciary debate follows efforts by Nevada and New Jersey to promulgate their own rules. New Jersey’s securities regulator has been receiving public feedback on its proposal — and fierce opposition from Wall Street firms and trade groups.

“We are proposing this standard, because the SEC has failed to provide investors with the protections they need against conflicts of interest in the financial industry, with its recent Regulation Best Interest rule,” Massachusetts Secretary of the Commonwealth William Galvin said in a statement.

New Jersey’s fiduciary rule would limit investor “access to financial advice, products and services,” the Financial Services Institute claimed in a public comment letter issued Friday.

The state’s proposal may create investor confusion because it is also misaligned with the SEC’s Regulation Best Interest, the trade group says.

Brokerages including Morgan Stanley have threatened to pull business from Nevada if the state follows through in imposing a fiduciary standard.

Some trade groups and Wall Street CEOs had hoped the SEC would preempt state action, arguing that state rules would create an expensive and unruly patchwork of regulations. But the SEC refrained from doing so.

Instead, the commission passed Reg BI and three related regulations in a three-to-one vote earlier this month.

Though Reg BI is not a fiduciary rule, SEC Chairman Jay Clayton said during the regulator’s hearing that it draws on “key fiduciary principles and cannot be satisfied through disclosure alone.”

william-galvin-Massachusetts-regulator-bloomberg-news
William Galvin, Secretary of then Commonwealth of Massachusetts, speaks during a hearing of the House Financial Services Capital Markets Subcommittee on trading practices in the Mutual Fund industry in Washington, DC November 6, 2003. Photographer: Chris Kleponis/Bloomberg News.

Still, fiduciary advocates and some advisors criticized the commission’s new standard for falling well short of what they deem to be necessary protections. The “best interest” standard doesn’t include stringent enforcement mechanisms and relies too heavily on disclosures that will lead to greater investor confusion, critics charge.

RIAs and others were also outraged that the commission changed its interpretation of an RIA’s fiduciary duty — which can now be fulfilled through either mitigating conflicts of interest or disclosing them. Previously, RIAs had to do both.

The Massachusetts Securities Division pointed to these and other criticisms of the SEC in justifying its proposed fiduciary rule.

It isn’t clear, the state regulator says, that Regulation Best Interest will rectify some of the most problematic practices in wealth management. For example, while product-specific sales contests may be prohibited, broader-based sales contests and quotas aren’t necessarily forbidden, according to Galvin’s office.

The Massachusetts Securities Division says its own enforcement actions demonstrate the need for a uniform fiduciary standards. The state regulator says it “has repeatedly held firms accountable for the damage suffered by investors due to conflicts that would be avoided when the firms and individuals are held to a uniform fiduciary standard.”

Among regulatory actions taken in recent years, Galvin’s office charged about 30 Morgan Stanley financial advisors with running “unethical” sales contests. It and other state regulators also fined LPL Financial $26 million for advisors’ sales of unregistered securities.

The Massachusetts regulator also noted that the SEC was authorized to craft a fiduciary rule under a provision of the Dodd-Frank Act, but failed to do so.

“The need for a conduct rule mandating that investment advice must be provided under a fiduciary standard has been recognized for many years,” the Massachusetts Securities Division says.

The state regulator will take public comment on its proposal until July 26.

For reprint and licensing requests for this article, click here.