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William Galvin
William Galvin

Consumer Advocates Denounce 'Rollbacks' in Mass. Fiduciary Rule

One investor group argues the state’s final rule, going into effect March 6, has been significantly weakened to mirror some of the worst aspects of Reg BI. Meanwhile, industry groups are concerned with how fast the rule has been finalized.

Eight months after Massachusetts Secretary of the Commonwealth William Galvin first proposed the adoption of a true fiduciary standard, the state’s Securities Division announced today that the new regulation will go into effect on March 6. But consumer advocates who’d previously supported the regulation were critical of the “rollbacks” they believe Galvin made in the final rule.

“They’ve weakened it in some serious ways,” said Micah Hauptman, the financial services counselor at the Consumer Federation of America. “While it has some improvements over Reg BI, it’s not nearly enough to protect investors from conflicted advice, and it’s not a model that other states should follow.”

Galvin originally sought public comment periods for its own fiduciary rule several weeks after the SEC passed its Regulation Best Interest rule in June 2019, with Galvin saying that the new rule will protect Massachusetts retirees from receiving conflicted investment advice, which he asserted cost investors “billions of dollars” per year.

“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 said. “Enacting this rule will provide stronger protections for Massachusetts investors, by imposing a heightened duty of care and loyalty on broker/dealers and agents.”

While the rule will go into effect on March 6, the Securities Division will not begin enforcement of the rule until Sept. 1, according to his office. In December of last year, Galvin signed off on the new regulations, which was followed shortly thereafter by a public hearing on the proposed regulation in early January.

At the hearing, trade associations like the Securities Industry and Financial Markets Association and the Financial Services Institute argued that they were worried the rule could cripple retail brokerage business in the Bay State, while consumer advocates, including representatives of the Institute for the Fiduciary Standard and the CFA sent letters in support of the proposed rule.

The final rule includes several changes in its language, including the removal of language about the selling of insurance products and about investment advisors, with the argument being that the latter were already subject to a federal fiduciary standard, according to Galvin's office. Barbara Roper, the director of investor protection at the CFA, criticized the new rule for amending language about a broker’s duty of loyalty to its clients. While the new rule states that brokers must "make all reasonably practicable efforts" to avoid, end or mitigate conflicts, previous versions of the rule stated that disclosure and mitigation alone could not demonstrate a duty of loyalty. Now, the rule mentions only that disclosure has not been able to meet the duty of loyalty. According to Roper, the new language was “clear as mud” in its meaning.

Additionally, the final rule made a change to whether brokers are subject to an ongoing fiduciary duty, according to Hauptman and Roper. Originally, the proposal had explicitly said that if a broker receives ongoing compensation or fees as the result of a recommendation to a client or leads a broker to “reasonably expect” ongoing services, that broker has an ongoing fiduciary duty. But the final rule purportedly means brokers do not have an ongoing duty even if they continue to receive compensation. Roper argued that this change significantly weakened the rule and mirrored some of the worst aspects of Reg BI.

“I don’t understand why they’d take on his fight if they weren’t going to defend their proposal, because I don’t think this will keep them from getting sued,” she said. “When they took on this fight, they understood what was coming. They knew all the arguments the industry was going to make.”

Both SIFMA President Kenneth Bentsen and FSI President and CEO Dale Brown said the associations were in the midst of reviewing the new rule, and Brown urged Galvin to wait until Reg BI was implemented. He argued that the federal standard would enhance investor protection and that he was concerned by the “speed” with which the Securities Division had developed the final rule.

“Massachusetts investors’ access to the same selection of financial advice, products and services as the rest of the country is at stake,” Brown said. “Limiting these options puts constraints on their ability to achieve their financial goals.”

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