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William Galvin
William Galvin

Massachusetts Starts Enforcing Its Fiduciary Rule

Industry stakeholders are now looking to Massachusetts to see how aggressively the state enforces the rule and gain insight into how other states may follow suit.

After going into effect in March, Massachusetts’ fiduciary rule is now being enforced. Financial firms, industry and consumer advocates, and regulatory experts are now looking to regulators in the Bay State to see how it unfolds. Massachusetts’ approach could provide a model for how other states implement their own fiduciary standards.

Amy Greer, a partner with the law firm Baker McKenzie, said on a webinar last week that she believed Massachusetts may try to move quickly on pursuing robust enforcement of the rule, which would not be out of line with the state’s previous approach on other rules.

“I think we can have some expectation that Massachusetts is going to be Massachusetts. They tend to be litigious, though I think that they may take a while to get there,” she said. “But they tend to be different, shall we say, than other regulators in how matters move forward.”

Massachusetts Secretary of the Commonwealth William Galvin originally announced his office was seeking public comments for a state fiduciary rule in the weeks following Regulation Best Interest’s approval by the SEC in June of 2019. At the time, he argued that the SEC had failed to properly protect investors against conflicts of interest, and that Reg BI could not replace a uniform fiduciary standard. Galvin signed off on the rule in December, and after a public hearing in January, the rule went into effect in March. 

In a statement to, Galvin noted Massachusetts was, thus far, the only state to adopt a fiduciary rule for broker/dealers.

“I intend to police this area to ensure that its important obligations are being met by industry,” he said. “If challenged, my office is ready to defend this rule to the full extent of the law to protect Massachusetts investors against breaches of fiduciary duty and conflicts of interest.”

Trade associations like the Securities Industry and Financial Markets Association (SIFMA) and the Financial Services Institute (FSI) argued that they were worried the rule could cripple retail brokerage business in the state. Consumer advocates supported the new standard.

However, some consumer advocates decried changes to the final rule. Some language had been removed about selling insurance products and about investment advisors, with Galvin’s office arguing the latter were already subject to a federal fiduciary standard. Barbara Roper, director of investor protection at the Consumer Federation of America, also pointed to changes in language saying that brokers must “make all reasonably practicable efforts” to avoid, end or mitigate conflicts; previous versions said that disclosure and mitigation alone would not demonstrate a duty of loyalty. 

“There are some differences between the Massachusetts law and Reg BI. The Massachusetts law is explicitly a fiduciary standard, for example, whereas Reg BI is explicitly not a fiduciary standard,” Roper said. “If there’s someone that can make something out of it, Massachusetts has a record of making the most of what authority it has, so we’re keeping an open mind and hoping for the best.”

According to Greer, the Massachusetts Securities Division’s likely attitude toward enforcement contrasted with what she speculated Reg BI enforcement would entail, at least through the end of the year. Even if Joe Biden defeats President Donald Trump in the upcoming election, Greer surmised that you wouldn’t see changes in approach at the SEC until next spring. 

In the meantime, she expected more guidance from the commission, as well as commentary on what SEC staff is seeing in how firms have complied (or failed to comply) with Reg BI. But she did not expect enforcement referrals in the near future at the SEC unless a firm blatantly failed to do anything.

“Massachusetts is a whole different ball game. The (Massachusetts Securities Division) is always very aggressive, and it’ll be interesting to see how, in regard to its reviews and its efforts to see whether its rule is being complied with, whether they go ahead and attempt to bring a big case,” she said. “That would be very much like them, but we can only wait and see.”

After a federal appeals court struck down a lawsuit by XY Planning Network claiming Reg BI would harm RIAs and investors, some, including Knut Rostad, the co-founder and president of the Institute for the Fiduciary Standard, speculated that more states would consider creating their own fiduciary rules. He said the next significant step would come when a state’s regulation faces its first legal challenge; considering Massachusetts is the first to enact such a standard, it’s likely that such a legal challenge will happen there. 

Rostad also surmised that some states might be more aggressive than the final Massachusetts rule, but he still supported Galvin’s work on its passage, saying no one needed to lecture Galvin on the definition of fiduciary.

“I supported the rule because it got as much as it could in today’s political environment,” he said. “While it fell short in a number of areas, it should be a net benefit to investors. The key is to level with investors in the Commonwealth. Tell the truth. Don’t call it fiduciary if you don’t believe a broker following the rule can reliably deliver fiduciary.”

When navigating compliance with both Reg BI and Massachusetts’ rule, A. Valerie Mirko, a partner at Baker McKenzie, stressed the importance of documenting any conflicts assessment and training for representatives. She noted that some states that were moving forward on their own fiduciary proposals were still far behind Massachusetts; New Jersey, for example, had opened a public comment period on its own potential regulation, but that (and all other pending regulation) had been paused by Gov. Phil Murphy due to the COVID-19 crisis.

“All eyes are on what the Massachusetts Securities Division does next,” Mirko said. “I don’t think we’ll be seeing that gentler touch with the Massachusetts Securities Division. That’s something we’re all focused on, and that’s the state to focus on more than the potential states that may or may not jump into the fray in the next few months.”

If the Massachusetts law were to survive a legal challenge, what comes next could, in part, depend on the next occupant of the White House, according to Roper.

“If the state’s authority in this area is upheld, and we don’t get a new administration and Reg BI remains the law of the land, and assuming it’s shown to be as ineffective as we expect it to be in changing broker/dealer conduct, I think you’ll start to see states stepping in to this area and considering action to strengthen laws at the state level,” she said. “If the administration were to change and a new administration would take this issue up, I think states would be happy to let the SEC solve this problem, if it will.”

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