Massachusetts begins enforcing fiduciary rule despite Reg BI

Massachusetts began enforcing Tuesday a regulation that would raise the investment-advice standard for brokers, becoming the first state to implement a rule to compete with a new federal advice standard.

Under the Massachusetts regulation, all financial advisers, including brokers, would be held to a fiduciary standard that requires them to make investment recommendations without regard to their own financial interests.

The rule goes into force two months after the implementation of the SEC’s Regulation Best Interest, another new broker advice standard. Under Reg BI, brokers are prohibited from putting their own interests ahead of those of their clients. The SEC is continuing to hold investment advisers to a fiduciary standard.

The SEC maintained the June 30 compliance deadline despite the coronavirus pandemic. In guidance, it has told brokerage firms it is looking for “good faith” efforts to adhere to Reg BI and suggested it will give them time to adjust.

Massachusetts, which has a reputation for tough securities law enforcement under Secretary of the Commonwealth William Galvin, could take a more aggressive approach with its advice regulation.

“We may see things move fairly quickly,” Valerie Mirko, a partner at Baker McKenzie, wrote in an email. “I don’t think we’ll be seeing that gentler touch with the Massachusetts Securities Division.”

Kurt Wolfe, a securities compliance attorney at Troutman Pepper, said the financial industry is watching Galvin to see how quickly he comes out of the gate with fiduciary enforcement.

“If you’re operating in Massachusetts or making recommendations in Massachusetts, you have to comply with their more restrictive standard or risk enforcement action,” Wolfe said.

Neither Galvin nor a spokesperson was available for comment due to the state’s primary election on Tuesday.

Barbara Roper, director of investor protection at the Consumer Federation of America, said the effectiveness of the Massachusetts rule will depend on Galvin.

“If anyone can give this standard teeth, it may be Massachusetts because of their strong enforcement record,” Roper said. “I have more faith in Massachusetts to get tough on brokers to address their conflicts than I do the SEC.”

As it was being formulated, the Massachusetts rule was modified to ease the definition of ongoing client relationships that trigger fiduciary duty. Mirko said the final version of the measure aligns more closely with Reg BI than the original proposal.

In addition, the state said its fiduciary rule would not apply to sales of variable annuities, which have become a flash point in debates over conflicts of interest.

“It was disappointing that the standard was weakened so much during the [rulemaking] process,” Roper said.

Galvin said he drew up the state’s fiduciary rule because Reg BI was too weak to curb broker conflict.

“It’s a more difficult standard that Reg BI,” Wolfe said. “There is a clear intention at the Massachusetts Securities Division to treat this as a fiduciary obligation.”

Massachusetts is the first state to implement its own fiduciary rule. New Jersey and Nevada are considering similar measures. That makes Massachusetts an important test case — and a likely target for litigation, Wolfe said.

Opponents of the Massachusetts rule could file a lawsuit asserting Reg BI pre-empts state-level advice rules. “It’s ripe for challenge,” Wolfe said. “We’re going to see it, and it won’t take long.”