Massachusetts to Impose Fiduciary Rule on Brokers in March
Massachusetts has finalized a rule to impose a fiduciary duty on brokers in the state and set a March 6 implementation date, the state’s securities regulator said on Friday.
The rule, which was revised from an initial draft introduced in July 2019, will require brokers giving advice to retail investors to give recommendations “without regard to the interests of anyone but the customer.” The state will begin enforcement on September 1.
“Since the SEC has failed to enact a meaningful conduct rule to protect working families from abusive practices in the brokerage industry, it has been left to my office to apply a real fiduciary standard on broker-dealers and agents in Massachusetts,” Secretary of the Commonwealth William F. Galvin said in a release.
Massachusetts efforts were widely opposed by brokerage industry trade groups, which are also fighting similar state-specific fiduciary rules in Nevada and New Jersey that they say will create a jumble of disparate standards that increase compliance costs. (Maryland last year postponed consideration of its own fiduciary standard.)
But investor groups who had supported the states initial effort also panned the final rule for removing key protections based on industry criticism. The final rule, for example, exempts sales of insurance products and removes a provision that would have applied an “ongoing duty of care” when brokers received ongoing compensation such as 12b-1 fees.
The state also clarified sales contests to exclude “implied or express quota requirements and other special incentive programs.”
“It’s much watered-down,” said Barbara Roper, director of investor protection for the Consumer Federation of America. “It is a modest improvement over Reg BI, but it’s not a model that we would want other states to follow.”
“There is no way that the customer is going to understand that a mutual fund is subject to this duty, but an annuity recommendation is not,” Roper added.
Industry trade groups still maintained their opposition to the rule despite the state’s modifications. The American Securities Association, which represents regional brokerage firms, also criticized the state for promulgating its own rule ahead of the SEC’s broader effort.
“This is an unfortunate development for the citizens of Massachusetts,” ASA chief executive Chris Iacovella said in a statement. “The Secretary and his allies politicized this issue from the beginning and adopting a final rule before the SEC national standard becomes effective further illustrates this point.”
A spokeswoman for the Securities Industry Financial Markets Association, the largest securities industry trade group, said she could not immediately comment on the rule or whether they will seek to challenge the rule in court.
“They ended up with a rule that the industry still hates because it’s a separate standard, but that groups like ours are also disappointed by,” Roper said.