A revised proposal to raise investment advice standards in Massachusetts would require advisers in the state to guide clients without thinking of their own compensation, but appears to remove language from a prior version that would require them to recommend the best available investment option.
Massachusetts Secretary of the Commonwealth William Galvin
posted the Fiduciary Conduct Standard Proposal on Tuesday. He
filed it last Friday with the state's publications and regulations division. In June, Mr. Galvin
released a pre-proposal, which was
put out for public comment.
The new proposal cannot be promulgated as a final rule until after a public hearing, which will be scheduled in the coming weeks.
Like the summer version, the most recent proposal would impose a fiduciary duty on the state's broker-dealers and investment advisers. They would have to disclose material conflicts of interest, avoid conflicts and "make recommendations and provide investment advice without regard to the financial or any other interest of any party other than the customer or client," the proposal states.
The revised proposal and the previous one both say that disclosing or mitigating conflicts of interest does not resolve conflicts.
But the revised proposal appears to diverge from the pre-proposal when it comes to the extent to which financial advisers must scour the investment landscape in doing their job. The pre-proposal said it would be a breach of fiduciary duty if an adviser received compensation for recommending a strategy, account type of product "that is not the best of the reasonably available options for the customer or client."
That language has drawn criticism from the brokerage industry for being too vague a standard that would be difficult to meet.
The "best option" language does not appear in the revised proposal. Instead, it says that there would be a breach of fiduciary duty if a "recommendation is made in connection with any sales contest, implied or express quota requirement, or other special incentive program."
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Debra O'Malley, a spokeswoman for Mr. Galvin, declined to comment on the substance of the revised proposal. She said there likely would be a discussion of the changes to the pre-proposal at the upcoming public hearing.
Mr. Galvin said he is moving ahead with his fiduciary duty proposal because the Securities and Exchange Commission's advice reform effort won't sufficiently protect investors. The centerpiece of an SEC regulatory package approved over the summer is
Regulation Best Interest, which is designed to raise the broker standard above suitability. Investment advisers already must adhere to fiduciary duty.
Mr. Galvin is likely to hear criticism of his proposal from representatives of the financial industry, who have argued that Massachusetts and other states pursuing their own investment advice reform —
including New Jersey and Nevada — should defer to the SEC.
"We don't think it makes sense to have the states pre-judge how the SEC rule will or won't work in practice," said Jason Berkowitz, chief legal and regulatory affairs officer at the Insured Retirement Institute.
