The comment period for the proposed fiduciary rule in Massachusetts ended Friday, and proponents and challengers of this conduct standard battled it out once again.
Pro-fiduciary rule groups, including the Consumer Federation of America, say they “greatly appreciate states such as Massachusetts that are willing to step in to fill the regulatory void by providing the protections investors reasonably expect and desperately need.”
Nevada and New Jersey are also working on their own fiduciary rules.
However, “while well-intentioned,” Massachusetts’ proposal “will limit both the choices available to consumers and their access to one-on-one assistance,” according to broker-dealer lobby group Sifma, echoing sentiments it also expressed against the Nevada and New Jersey fiduciary initiatives.
Last month, the Massachusetts Securities Division of the Office of the Secretary of the Commonwealth sought comments on its proposal to apply a fiduciary conduct standard to broker-dealers, agents, investment advisors, and investment advisor representatives when dealing with their customers and clients.
The proposed fiduciary conduct standard is based on the common law fiduciary duties of care and loyalty, according to the division.
The standard requires that recommendations and advice be made in the best interest of customers and clients without regard to the interests of the broker-dealer or advisory firm or its personnel.
The standard allows for the payment of transaction-based remuneration if the remuneration is reasonable, it is the best of the reasonably available remuneration options and the care obligation is satisfied.
The Massachusetts Securities Division says the proposed fiduciary obligation applies to the provision of recommendations, advice and to the selection of account types. Thus, the conduct standard would apply to recommendations to open IRA rollover accounts and recommendations to open accounts involving asset-based or transaction-based remuneration.
Pro-fiduciary rule proposal
A group of 15 fiduciary rule proponents have outlined in a comment letter why they support the Massachusetts proposal:
- Broker-dealers portray themselves and function as investment advice providers who are in positions of trust and confidence with their customers. Applying a common law fiduciary duty to these relationships is entirely appropriate.
- The SEC’s Regulation Best Interest will not meaningfully change harmful industry practices or improve protections for investors.
- Massachusetts should apply a broad fiduciary standard of conduct to all advisory activities. Moreover, the specific formulation of the fiduciary standard is critical.
- Arguments that this proposal would be preempted if enacted have no merit.
The groups consist of the Alliance for Retired Americans, Americans for Financial Reform Education Fund, Better Markets, Center for American Progress, Center for Economic Justice, Consumer Action, Consumer Federation of America, Committee for the Fiduciary Standard, EPI Policy Center, Fund Democracy, Massachusetts Budget and Policy Center, MASSPIRG (a consumer group that bills itself as standing up to powerful interest), Massachusetts Communities Action Network, National Employment Law Project and the Woodstock Institute.
“Given how broker-dealers advertise and function as advisers in position of trust and confidence with their customers, it is entirely appropriate to apply a common law fiduciary duty to their advisory activities,” the groups say.
The groups say there are “myriad ways in which broker-dealers seek to persuade the investing public that they are providing objective, trustworthy investment advice rather than mere sales pitches.”
For example, brokerage firms and their registered representatives “routinely market themselves as financial advisors, financial consultants or wealth managers, giving the impression of specialized advisory expertise," according to the groups.
“The clear intent of this marketing is to convince investors that they should trust that their ‘advisor’ will be looking out for their best interests and to encourage them to rely on their expertise and recommendations,” the groups say.
Anti-fiduciary rule proposal
However, Sifma argues that the Massachusetts fiduciary rule proposal will limit access to “critical financial education, advice and guidance,” which will have a “substantial negative impact on consumers.”
“Consumers will be adversely affected by the limitations placed on programs available to them, the pricing of those programs, and the investment products available, which could include losing access to personal, one-on-one assistance,” Sifma says in its comment letter.
“Substantial inconsistencies between the federal standard and the proposed Massachusetts rule will also create confusion for consumers and financial professionals and come with significant operational and compliance costs,” the lobbying group adds.
Sifma wants Massachusetts to “allow Reg BI to be fully implemented before moving forward with a state-specific fiduciary rule.”
“We believe that once Reg BI is fully operational and the SEC, Finra and state regulators begin examining for compliance, the division will find that Massachusetts investors are receiving substantial additional protections while continuing to have access to the numerous choices and opportunities they have today,” Sifma says in its comment letter.
Separately, Sifma and other challengers of the Massachusetts fiduciary rule submitted a comment letter addressing what they believe are “important" "universal concerns” to highlight regarding the proposal. This group put forth a dozen points:
- Reg BI’s heightened standard adds substantial and meaningful new investor protections.
- A “best of” standard is impossible to satisfy and should not be used.
- An ongoing monitoring requirement is inconsistent with the brokerage model and will likely limit consumer choice.
- An “avoid conflicts” requirement is unworkable.
- The proposal’s “without regard to” language is highly problematic.
- The proposal should be amended to expressly exempt variable contracts.
- The proposal should be amended to explicitly exempt principal transactions.
- The disclosure obligation should be made consistent with Reg BI.
- The proposal provides no guidance on how to address cost.
- Any regulation should be limited to customers with Massachusetts domiciles.
- The proposal raises pre-emption and other legal concerns.
- Any final regulations should include a reasonably implementation period and effective date.
That comment letter was co-signed by Sifma, Insured Retirement Institute, NAIFA Massachusetts, Life Insurance Association of Massachusetts, National Association for Fixed Annuities, Center for Capital Markets Competitiveness of the U.S. Chamber of Commerce, American Council of Life Insurers, Institute for Portfolio Alternatives, Alternative & Direct Investment Securities Association, Money Management Institute, National Association of Insurance and Financial Advisors and the Financial Services Institute.