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Bay State Balks at Best Interest Proposal

Massachusetts Secretary of the Commonwealth William F. Galvin says that the SEC has proposed a “weak and unclear standard” which, unless modified, will force the Bay State to adopt its own rules to protect investors and require broker-dealers to provide non-conflicted advice in the best interest of their clients.

“I had hoped that the SEC would follow the lead of Congress, as set out in the Dodd-Frank Act, and propose a strong conduct rule which would protect working families from abusive practices in the brokerage industry when they save for retirement and other major financial goals, but this proposed standard falls far short of the protections Main Street investors need,” Galvin wrote.

In his comments, Galvin aligned his position with that Massachusetts Sen. Elizabeth Warren (D), who recently called for investors harmed by bad conduct of their broker-dealers to be given the right to bring legal actions. “You can sue your doctor for malpractice. You should be able to sue your broker-dealer for the same reason,” Galvin wrote.

‘Fiduciary Light’

Galvin stated in his letter that stockbrokers serving retail investors need to be subject to a true fiduciary standard, which would require them to put their customers’ interest first, in the same manner required for investment advisers. Referring to it as “fiduciary light,” Galvin stated that it is his belief that the SEC’s proposal presents merely a veneer of a fiduciary standard, and that it would not protect the consumer, but “will give industry plenty of cover from potential lawsuits.”

As other commenters have done, Galvin criticized the proposal for not defining the best interest of the customer, “exacerbating existing confusion among investors who are unsure about the standards their broker must observe.” It is a criticism that SEC commissioner Hester Peirce rejected at the recent NAPA DC Fly-In Forum, though even the SEC commissioners who voted to release the proposal for public comment expressed concerns at the time.

“As a regulator, I have seen the grievous harm suffered by Main Street investors who mistakenly trusted and relied on conflicted investment advice,” Galvin said. “The Commission now has the opportunity of a generation to protect them, if they fail to do so, it will be left to the states.”