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Regulation and Compliance > State Regulation

Business Groups Blast Massachusetts Fiduciary Plan as Comment Period Ends

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The U.S. Chamber of Commerce urged William Galvin, Massachusetts’ top securities regulator, on Tuesday to extend the comment period on the state’s fiduciary proposal, as the revised plan raises “serious new legal and practical concerns.”

The Massachusetts Securities Division held a hearing Tuesday morning on its revised fiduciary rule, which Galvin, the Massachusetts secretary of state, signed off on in early December.

In comments to Galvin, the Chamber and four local chambers of commerce said an extended comment period would allow for a “more detailed analysis of some of the new issues raised” by the revised plan.

The comment period, which expires Tuesday, had a “very short deadline” of just over three weeks that coincided with “several federal and state holidays as well as significant religious and cultural celebrations,” which made “it difficult for the public to fully analyze the proposal and the impact it will have on the Commonwealth and its citizens,” the Chamber argued.

A spokesperson for Galvin’s office told ThinkAdvisor on Tuesday morning that the fiduciary rule will be approved and enacted after the division reviews all the testimony it receives and determines “if any changes are necessary.”

The law firm Baker McKenzie notes in a recent client alert that the Massachusetts proposal is an updated version of a pre-proposal originally circulated on June 14, 2019.

The new plan “will likely reduce investor access and choice,” the chambers of commerce argued. Also, they said, Massachusetts should not finalize its plan until the Securities and Exchange Commission’s Regulation Best Interest and Form CRS are implemented.

“These new SEC rules fundamentally change the duties and obligations of broker-dealers, significantly enhancing investor protection and preventing investor confusion,” the chambers state. “Unfortunately, in the Request for Comment document accompanying the revised Proposal, the Division again inaccurately describes the requirements of the new rules and incorrectly dismisses them as having little effect.”

The Massachusetts Securities Division “cannot properly assess the impact of Reg BI and Form CRS until the new protections are implemented, and broker-dealers and others develop and adopt new policies and procedures to comply,” the chambers state.

Finalizing its proposal “based on the Division’s assumptions and misperceptions about the rules, and on the Division’s desire to challenge the new Federal rules with a conflicting standard before the new Federal rules take effect, will result in unnecessary costs, confusion and harm for the Commonwealth’s investors,” the chambers said.

Ken Bentsen, president and CEO of the Securities Industry and Financial Markets Association, said his lobbying group was “very concerned that the proposal exceeds the state’s authority, will diminish investor access to advice, products and services and will increase investor costs.”

Bentsen, too, said Massachusetts should delay “any decision making until after Reg BI is fully implemented and the SEC, FINRA, and the Division and other state regulators have the chance to examine firms for compliance.”

Kevin Mayeux, CEO of the National Association of Insurance and Financial Advisors, said during his testimony that NAIFA has “significant concerns that the proposal, if adopted, will negatively impact the ability of small and mid-market consumers — who make up a majority of our members’ clients — to access financial products and professional advice, guidance and service.”

Why? “Because the proposal favors a fee-based, advisory business model over a commission-based brokerage model,” Mayeux said.

“If regulators pick winners and losers in the marketplace in this manner, the result will be an increase in consumers’ costs and a decrease in consumer choice.”

He stated that the Massachusetts plan’s “bias towards a fee-based advisory model is due to, among other things, the broad and vague way the proposal addresses conflicts of interest; the requirement that covered persons make recommendations, quote, ‘without regard to the financial or other interest of any party other than the customer or client’; and the increased compliance costs and responsibilities that will result from the proposal’s fiduciary duty and its ongoing obligations.”

If adopted in its current form, the proposal “will likely lead to large numbers of broker-dealers and their registered representatives changing their business practice from a commission-based brokerage practice to a fee-based business model.”

A fee-based advisory model, Mayeux argued, “is often more expensive to consumers over the long run.”

Dale Brown, president and CEO of the Financial Services Institute, said in his testimony that the Massachusetts plan “does not adequately complement Reg BI.”

While FSI appreciates that the proposal “contemplates both an episodic and an ongoing fiduciary duty requirement, … the structure and requirements of the Proposal will result in the vast majority of broker-dealer relationships becoming subject to an ongoing fiduciary duty requirement.”

The proposal, Brown continued, “has numerous triggers for an ongoing fiduciary duty relationship, including the new titling provision, contractual provisions for any monitoring, and the highly subjective criteria of customer expectations of regular or periodic monitoring. Under the Proposal, and because of these triggers leading to an ongoing fiduciary relationship, a broker-dealer would often be unable to provide one-time or occasional investment advice to its brokerage clients even if such advice is in the clients’ best interest.”

Broker-dealers seeking to comply with the new ongoing duty “would face significant increased costs associated with demonstrating compliance with the proposal,” Brown said.

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