The Massachusetts Secretary of the Commonwealth has finalized a new fiduciary conduct standard, one that, consistent with the recommendation of the American Retirement Association, acknowledges ERISA’s preemption.
Contending that the SEC’s Regulation Best Interest falls short, Secretary William Galvin on Feb. 21 finalized regulations to hold broker-dealers and agents who conduct business in Massachusetts to a heightened fiduciary standard of conduct when making recommendations and providing investment advice to customers.
The new regulations will go into effect March 6 and will be enforced beginning Sept. 1, 2020.
“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,” Galvin stated. “Enacting this rule will provide stronger protections for Massachusetts investors, by imposing a heightened duty of care and loyalty on broker-dealers and agents.”
ARA Weighs In
The new regulations do make clear that they do not apply to those acting in the capacity of a fiduciary to an employee benefit plan, its participants or its beneficiaries as defined in ERISA. The final regulations also remove references to investment advisers and investment adviser representatives who are already subject to a fiduciary duty.
The American Retirement Association—parent organization of the National Association of Plan Advisors—weighed in on the proposal when it was under consideration, emphasizing that Massachusetts appropriately excluded ERISA plan fiduciaries from its proposed new standards and argued that the exclusion should be retained.
In a letter to the Secretary, the ARA noted that ERISA already provides a uniform body of benefits law and regulations that protect participants and beneficiaries, and that a state-law standard is problematic for ERISA-covered retirement plans due to the potential for conflicting standards between the states and those already in effect under ERISA.
Duties of Care and Loyalty
Under Massachusetts’ new regulations, the duty of care—sounding very similar to ERISA’s—requires a BD or agent to use “the care, skill, prudence, and diligence that a person acting in a like capacity and familiar with such matters would use, taking into consideration all of the relevant facts and circumstances.”
To that end, a BD or agent must take into consideration:
- the risks, costs, and conflicts of interest related to all recommendations made and investment advice given;
- the customer’s investment objectives, risk tolerance, financial situation and needs; and
- any other relevant information.
The final regulations extend the duty beyond the recommendation period under certain circumstances, including, for example, if the BD or agent has discretionary authority over the customer’s account or when there is an agreement to monitor the customer’s account on a regular or periodic basis.
The duty of loyalty requires a BD or agent to:
- disclose all material conflicts of interest;
- make all reasonably practicable efforts to avoid, eliminate and mitigate conflicts of interest; and
- make recommendations and provide investment advice without regard to the financial or any other interest of any party other than the customer.
The term “customer” includes current and prospective customers, but does not include, for example, banks, insurance companies, registered investment companies, BDs registered with a state securities commission or investment advisers registered with the SEC.
Additionally, the new regulation includes a prohibition on all sales contests, which Galvin suggests is a repeated cause of harm to investors. Galvin notes that this rule goes beyond the SEC’s regulations, which bans only those contests which are product-specific or limited to particular securities in particular time periods.
Interestingly, just weeks before Galvin finalized these regulations, numerous comment letters were submitted in opposition to the proposed regulations, including a letter from Massachusetts Governor Charles Baker (R), as well as a letter from more than 25 state representatives, who argued that the proposal “goes too far and will have harmful unintended consequences to investors.”
In June 2019, Galvin released a preliminary proposal followed by a formal draft in December 2019.
Activity in Other States
Following the Fifth Circuit’s dismissal of the Obama administration’s fiduciary rule and concerns regarding the “heft” (or lack thereof) of the SEC’s Regulation BI, a number of other states have initiated expansion of, or consideration of expanding, fiduciary thresholds. The American Retirement Association has continued to remind these states, which include Nevada, Maryland and New Jersey, of ERISA’s scope and preemption of state regulations.
