Massachusetts promulgates final fiduciary rule with some controversial parts removed

This story has been corrected to indicate that the final Massachusetts fiduciary rule won't apply to insurance product sales. An earlier version said it wouldn't apply to insurance sales professionals. 

Massachusetts filed final regulations Friday that would raise investment-advice requirements for brokers in the state but that have been modified to meet some financial industry concerns.

The regulations, which go into effect March 6, would set a fiduciary standard for brokers when they make investment recommendations to customers. They would have to act without regard to their own financial interests. The state will begin enforcement on Sept. 1.

Massachusetts is the first state to issue a final fiduciary rule. New Jersey and Nevada also are considering setting their own fiduciary advice standards.

The Massachusetts rule differs from the Securities and Exchange Commission’s Regulation Best Interest for brokers, which will go into force on June 30. Under Reg BI, brokers cannot put their interests ahead of the customer’s interests.

Reg BI, as it is known, was the centerpiece of the SEC’s advice reform regulatory package approved last summer. But Massachusetts and other states say Reg BI doesn’t provide enough investor protection.

“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,” Massachusetts Secretary of the Commonwealth William Galvin said in a statement. “Enacting this rule will provide stronger protections for Massachusetts investors by imposing a heightened duty of care and loyalty on broker-dealers and agents. This standard will protect Massachusetts retirees and their hard-earned retirement savings from conflicted investment advice, which has been shown to cost investors billions of dollars each year.”

The brokerage industry opposes state-level fiduciary rules, saying they will create a patchwork of regulations that will make compliance difficult and costly. The industry favors Reg BI as the only advice standard.

The final Massachusetts rule has been modified from the original proposal to remove some provisions the industry fought.

Debra O’Malley, a spokeswoman for Mr. Galvin, said the final rule will not apply to insurance product sales and won’t impose an ongoing fiduciary duty on brokers unless account monitoring is part of the customer contract. The fiduciary duty would apply to transactions.

The final rule also doesn’t include adviser title restrictions and it doesn't apply to investment advisers, who are already held to a fiduciary standard. It also no longer governs municipal bond sales, Ms. O’Malley said.

The state’s Securities Division read comment letters and listened to the input during a hearing earlier this year, “and made changes that they felt were necessary based on that feedback,” Ms. O’Malley said.

The immediate indication was that the industry is not satisfied with the final Massachusetts rule.

“This is an unfortunate development for the citizens of Massachusetts," Chris Iacovella, chief executive of the American Securities Association, said in a statement. "It appears the secretary ignored the views of the public and adopted a rule that will harm investor choice and make it harder for the good people of Massachusetts to obtain financial advice. 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.”  

The Financial Services Institute is reviewing the final rule to see whether it "addresses the concerns we previously expressed," FSI CEO Dale Brown said in a statement.

"However, the speed with which the Securities Division moved this proposal to a final rule is deeply concerning, particularly given the significant number of comments submitted which merited careful consideration," Mr. Brown added.

An investor advocate said Mr. Galvin made too many changes to the rule in response to industry criticism.

"What's left is a modest improvement on Regulation Best Interest but not the kind of tough standard needed to protect investors from conflicted advice," said Barbara Roper, director of investor protection at the Consumer Federation of America. "Backing down on ongoing [fiduciary] duty is particularly disappointing. We were thrilled to see Massachusetts step up, and now they've backed down."

The fight over state-level advice standards is likely to continue. The financial industry has indicated that it is considering filing lawsuits against state rules.

“If a lawsuit happens, we’ll address it at that time,” Ms. O’Malley said.