Brokerage industry opposes Massachusetts fiduciary rule proposal at hearing

Brokerage and insurance industry representatives on Tuesday criticized a Massachusetts proposal that would impose fiduciary duty on all financial advisers in the state, but investor-protection advocates are confident the state won’t back down under industry pressure.  

Massachusetts Secretary of the Commonwealth William Galvin held an all-day public hearing Tuesday in Boston on the advice-reform proposal, which was first released in June. A revised proposal was released last month, and a comment period ended Tuesday.

The proposed regulation would require all brokers, investment advisers and investment adviser representatives to “provide advice based on what’s best for the customer or client, without regard to the interests of any other person,” according to a comment request.

The measure would apply to any recommendation of investment strategy, the opening of accounts or the purchase of any security commodity or insurance product. Brokers, who currently adhere to the suitability standard, would be subject to the fiduciary duty that already governs investment advisers “when the broker-dealer or agent is acting like an investment adviser,” the comment request states.

Mr. Galvin has indicated that Massachusetts is moving ahead with its rule because the Securities and Exchange Commission’s advice-reform effort, highlighted by Regulation Best Interest to raise the broker standard, is too weak.

Industry opponents on Tuesday told Massachusetts to defer to the SEC. Reg BI, as it’s known, must be implemented by June 30.

Dale Brown, president and chief executive of the Financial Services Institute, which represents independent broker-dealers and financial advisers, testified that the Massachusetts proposal was too broad in its application of ongoing fiduciary duty, which would prevent Bay State brokers from providing “one-time or occasional investment advice to its brokerage clients” because of significantly increased regulatory expenses.

“It will discourage broker-dealers from serving Massachusetts clients – whether because of cost or because of the narrow availability of episodic, rather than ongoing, fiduciary duty,” Mr. Brown said.

Kevin Mayeux, chief executive of the National Association of Insurance and Financial Advisers, said the Massachusetts proposal would lead brokers to switch from commission-based practices to a fee-based business model, which could price investors with modest assets out of the advice market.

In his testimony, he also expressed concern about the Massachusetts rule applying to insurance products, which “will likely result in increased costs to consumers of these products due to the costs of compliance with the additional regulations.”

Knut Rostad, president of the Institute for the Fiduciary Standard, doesn’t expect Mr. Galvin to modify the proposal significantly based on industry pushback at Tuesday’s hearing.

“[Mr.] Galvin has a clear-eyed view of what needs to be done, which he’s expressed in his proposal,” Mr. Rostad said. “I cannot conceive of anything the industry could do to change [Mr.] Galvin’s views that have been set out clearly for years.”

Investor advocates assert that the Massachusetts proposal gets advice-reform right.

“If adopted without weakening amendments, your proposal would not only improve protections for the citizens of Massachusetts, it would provide a model that other states could follow to extend these protections to their own citizens,” Barbara Roper, director of investor protection, and Micah Hauptman, financial services counsel, at the Consumer Federation of America wrote in a Jan. 6 comment letter.

Other states, including New Jersey and Nevada, are considering their own fiduciary proposals. Any state rule almost certainly will become the target of a lawsuit.

“The industry is adamantly opposed to a rule that would force to get serious about reining in harmful conflicts of interest to do what is best for the investor,” Ms. Roper said.

There’s no deadline for Massachusetts to promulgate a final rule. The proposal could be modified based on the input received at Tuesday’s hearings and in the comment letters, according to a spokeswoman for Mr. Galvin.