Massachusetts advances fiduciary duty proposal; public hearing required prior to final rule

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Bay State, New Jersey regulations could set standard for other states

A regulatory proposal to raise investment advice standards in Massachusetts advanced last week, giving momentum to state-level efforts to strengthen broker requirements independently of a new Securities and Exchange Commission advice reform regulation.

Last Friday, Massachusetts Secretary of the Commonwealth William Galvin filed a uniform fiduciary standard of conduct for financial advisers in the state. It would require that brokers and investment advisers make recommendations to clients “without regard to the interests of the broker-dealer, advisory firm and its personnel,” said a statement from Mr. Galvin’s office.

The Massachusetts fiduciary proposal is not yet final. It was put out for preliminary public comment over the summer. A hearing on the proposed regulations will be scheduled in the coming weeks, according to Debra O’Malley, a spokeswoman for Mr. Galvin. After the public hearing, Mr. Galvin can promulgate a final rule.

Mr. Galvin said he is moving ahead with his fiduciary proposal because the SEC’s Regulation Best Interest, which is designed to raise the broker advice standard above suitability, is too weak.

“I am proposing the standard because the SEC has failed to provide investors with the protections they need against conflicts of interests in the financial industry with its ‘Regulation Best Interest’ rule,” Mr. Galvin said in a statement. “My office has seen firsthand the serious financial harm that investors and savers have suffered as a result of conflicted financial advice. Investors must come first.”

Meanwhile, New Jersey proposed its own fiduciary standard last April. A spokeswoman for the New Jersey Bureau of Securities declined to say when a final rule would be adopted. Under state law, that must happen within one year of the release of the proposal, unless substantial changes are made to the proposal.

The Massachusetts and New Jersey approaches are similar, said George Michael Gerstein, counsel at Stradley Ronon Stevens & Young.

“It’s a matter of when and not if between Massachusetts and New Jersey,” Mr. Gerstein said of the state rules being finalized. “They could be a paradigm for other states to adopt. The stakes are relatively high.”

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The brokerage industry has resisted state-level advice regulation, arguing that Reg BI increases investor protection and allows firms to meet a national standard instead of dealing with potentially dozens of state standards.

“Massachusetts’ proposal creates differing requirements from those established by Reg BI,” Dale Brown, chief executive of the Financial Services Institute, said in a statement. “This will ultimately limit services and drive up costs for investors through increased confusion and higher compliance costs for financial advisers. Our members are diligently working toward compliance with Reg BI, and we strongly encourage Massachusetts to align its requirements with those of the SEC and other existing regulations.”

A brokerage industry lawsuit killed the Labor Department’s fiduciary rule for retirement accounts. Now, the industry is battling with several states. In addition to Massachusetts and New Jersey, Nevada is working on a fiduciary regulation, and New York and other states are considering legislation.

“The broker-dealer industry would like to quash the states before they get going,” said David Tittsworth, counsel at Ropes & Gray. “It’s getting serious. This looks like something [Mr.] Galvin intends to pursue. Opening the door on letting states have their own fiduciary regulations is certainly not what the broker-dealer industry wants.”

Investor advocates are cheering on the states. Unlike Reg BI, the Massachusetts proposal does not allow disclosure to mitigate conflicts of interest, said Knut Rostad, president of the Institute for the Fiduciary Standard.

“The Massachusetts proposal restores the importance of avoiding or eliminating conflicts as opposed to disclosing conflicts,” Mr. Rostad wrote in an email. “Stating that conflict disclosure alone is presumed insufficient to meet the duty of loyalty is important. Massachusetts treats conflicts like the poison they are. Reg BI does not.”

When states release final fiduciary rules, they are sure to be challenged in court by the brokerage industry, which adds another layer of uncertainty to advice reform.

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