(MA Lawyers Weekly) Massachusetts regulators are poised to impose a heightened fiduciary standard of conduct on investment professionals.
Late last year, Secretary of State William F. Galvin signed off on a proposed standard for broker-dealers, agents and investment advisors that would require those professionals to satisfy both the duty of care and the duty of loyalty in dealing with customers and clients. Specifically, covered professionals would be required to provide advice based on what is best for the client and without regard to the interests of the advisor or the firm for which the advisor works.
The new standard would apply to the provision of recommendations, advice and the selection of account types.
Massachusetts is not alone here. Similar fiduciary standards have been adopted elsewhere, including New Jersey and Nevada, and several other states are also considering proposals.
The latest proposal was designed to respond to perceived shortcomings in a Securities and Exchange Commission regulation adopted in June. “Regulation Best Interest” established a best interest standard of conduct for investment professionals making recommendations to a retail customer of any securities transaction involving securities, including recommendations on types of accounts.
“Regulation BI” was promulgated in accordance with authorization under the Dodd-Frank Wall Street Reform and Financial Protection Act for the SEC to establish a strong and uniform standard of conduct for broker-dealers. Covered entities must be in compliance by June 2020.
The local financial services industry has expressed serious opposition to the proposed Massachusetts standard. At a recent hearing on the subject, industry representatives argued that the difficulty of complying, along with the increased costs associated with doing so, would discourage broker-dealers from offering their services in Massachusetts.
The goal behind Galvin’s proposed standard is admirable: to better protect consumers. Local regulators are clearly concerned the new SEC rule isn’t stringent enough and falls short of what Dodd-Frank requires. But while that ultimately may prove to be the case, it seems premature to deem the federal regulation insufficient when it has not yet been fully implemented.
Further, requiring advisors to adhere to different standards at the national and state levels will inevitably lead to confusion and likely compliance failures. And the need to follow multiple regulatory schemes will lead to increased costs, which financial services providers will undoubtedly pass along to consumers.
All of this suggests that the best course for now is to hold off on final implementation of new state-level regulations until the full impact of the new SEC rule can be assessed.
