Speaking at an open hearing Tuesday morning, opponents of Massachusetts’ proposed plan to impose a fiduciary mandate on brokers reiterated warnings that it would lead some financial services firms to pull back from doing business in the state, an argument a consumer advocate for the rule called a "laughable objection."
William Galvin, Massachusetts’ Secretary of the Commonwealth, signed off on the rule in early December. The standard would require brokers to put client interests ahead of their own, and was proposed after the Securities and Exchange Commission's Regulation Best Interest Rule was issued. Advocates of the state rule claim the national standard does not go far enough in protecting investors from potential conflicts in the business models of brokers. Reg BI is slated to go into effect June 30.
Numerous industry advocates, both for and against the rule, met at the Massachusetts State House on Tuesday to make their final appeals.
Dale Brown, CEO of Financial Services Institute, implored Galvin to either align the rule more closely with Reg BI or wait until after the latter’s implementation so it could be properly assessed in oral testimony. If the proposed rule was implemented, Brown argued the majority of broker/dealer relationships would fall under the fiduciary context, making it harder for those firms to provide “one-time or occasional investment advice” to clients while also facing increased compliance costs. That would hurt not only brokers but also Bay State investors, he said.
“Massachusetts investors with a smaller amount of investable assets may be especially vulnerable to losing access to their chosen financial professional who can no longer serve them,” he said. “These outcomes are contrary to the best interest of Massachusetts investors.”
Securities Industry and Financial Markets Association President Kenneth Bentsen echoed those concerns. If retail brokerage accounts were subject to the same liabilities as fee-based advisory accounts, Bentsen testified that there’d be little economic sense to continue such accounts and firms would change their business models, leaving clients with fewer options and higher costs.
Bentsen also argued that the state proposal demanded record-keeping that extends beyond what is required by federal regulations, which could be in violation of 1996’s National Securities Markets Improvement Act—that argument has been cited by legal observers as a key point of contention over the state's fiduciary proposals. Bentsen also argued that having numerous state standards could have an adverse effect for consumers, during an interview with WealthManagement.com at SIFMA’s Manhattan offices last month.
“A number of these rules that have been proposed in Nevada, New Jersey and in Massachusetts conflict with Reg BI, and what’s going to happen and what firms have reported to us is, rather than create multi-state compliance models and take on additional compliance liabilities, they will just go to the common denominator, which is to say ‘we just won’t do brokerage in that state,” Bentsen said at the time.
Both SIFMA and FSI have been consistent supporters of the national Regulation Best Interest and critical of the proposed fiduciary rules that have come up at the state level.
Knut Rostad, the president of the Institute for the Fiduciary Standard and author of a comment letter in support of Galvin’s proposal, dismissed those arguments.
Businesses constantly threaten that new regulation will lead them to discontinue operations, he said, but it was inconceivable that a national financial services firm would simply quit doing business in the state because they don't like the rule.
Imploring Massachusetts to wait and see how the SEC's rule plays out before moving ahead with their own rule also made little sense, he said.
“The exhaustive release by the SEC makes it abundantly clear how the SEC intends to interpret, provide guidance, and how it intends to enforce Reg BI. I would love to be proven wrong, but based on what the SEC is saying, they’ve given the industry carte blanche to write, interpret and enforce their own policies and procedures,” he said. “The only legitimate caveat is if a court intervenes. That could change everything, but absent a court intervention, it’s abundantly clear how Reg BI is going to be enforced.”
Rostad also commended Galvin for what he said was a straightforward proposal and presentation of his reasoning. He noted that Galvin had clearly explained why advice concerning nonsecurities—like annuities—might still fall under his regulatory process.
“The Secretary explained that his duty is to regulate those registrants in the Commonwealth, and the entanglement beyond non-securities and securities advice is so strong he had to focus on the registrants themselves,” Rostad said. “That’s a good and clear explanation of that concern.”
In a letter supporting the proposal, Barbara Roper, the director of investor protection at the Consumer Federation of America, and Micah Hauptman, the CFA’s Financial Services Counsel, echoed Rostad’s skepticism that different state regulations would create confusion among investors and reduce business options for consumers. According to Roper and Hauptman, many of these same industry groups supported Reg BI, which they argue makes it difficult to discern the difference between the services each type of advisor provides.
“If industry groups were genuinely concerned about investor confusion, they could not have supported (Reg BI),” the letter read. “Under the Massachusetts proposal, investors would not have to know whether their investment professional is a broker/dealer or an investment adviser in order to try to figure out what type of regulatory protections apply.”
Kevin Mayeux, the CEO of the National Association of Insurance and Financial Advisors, argued that Galvin was placing a higher value on fee-based financial service models over commission-based models, which would lead many broker/dealers to move toward a fee-based business, potentially leaving retail brokerage clients, who generally have fewer investable assets, with a loss of options. Mayeux argued Massachusetts should delay any implementation until after the National Association of Insurance Commissioners completed amending its model regulations for annuity recommendations and sales to better align with Reg BI. The NAIC’s Annuity Suitability Committee voted in favor of the amendments last week, while a final vote may happen as early as next month.
“If individual states pursue their own standard of care regulations, the likely result will be overlapping, duplicative or conflicting requirements that could increase consumer confusion and result in serious compliance issues for firms and advisors,” he said.
A spokesperson for Galvin’s office could not offer an estimate on when the rule might be put into effect until after evaluating the comments and deciding if any changes to the final rule were needed.