What You Need to Know
- A court decision to uphold the Massachusetts fiduciary rule could open doors to similar regulations on brokers in other states, lawyers say.
- OMB could release Labor’s new fiduciary plan as early as this month.
- The Massachusetts ruling is somewhat of a recognition that Reg BI, for all its benefits, has a lot of flaws, says a former SEC attorney.
The fiduciary duty debate is raging once again with two recent developments: the Massachusetts fiduciary rule being upheld by the state’s highest court and the Labor Department’s new fiduciary rule being reviewed by the Office of Management and Budget.
With the ruling by the Massachusetts Supreme Judicial Court in late August, broker-dealers in Massachusetts providing investment recommendations or advice to retail customers now face a new compliance challenge: They must comply with the Securities and Exchange Commission’s Regulation Best Interest and with the state’s fiduciary rule.
A new fiduciary rule in Massachusetts brings with it a renewed impetus for other states to move forward with their own fiduciary rules — creating a patchwork of regulations, some observers complain — and is also an indication that Reg BI is flawed.
Labor filed its new fiduciary rule at OMB in early September.
While OMB reviews typically take 90 days, the word on the street is that OMB could release Labor’s fiduciary plan as early as this month.
“It makes sense for the proposal to be released by the OMB and published in the Federal Register before the next possible government shutdown in mid-November,” said Fred Reish, partner at Faegre Drinker.
Massachusetts Ruling
The Massachusetts Supreme Judicial Court ruled to uphold the Massachusetts fiduciary rule and allow Secretary of State William Galvin’s administrative case against Robinhood to move forward.
The case against Robinhood involves Galvin accusing the brokerage in December 2020 of violating state law by using overly “aggressive tactics to attract new, often inexperienced, investors” and “gamification to encourage and entice continuous and repetitive use” of its mobile application.
In April, Galvin, Massachusetts’ top securities regulator, appealed a Superior Court judge’s decision issued last March that struck down the state’s fiduciary rule.
With the Massachusetts Superior Court ruling, “broker-dealers operating in Massachusetts will be subject to a higher standard of care than that imposed by federal regulation and by almost any other state,” attorneys at K&L Gates opined in a recent alert.
The court’s determination that Reg BI “establishes a floor and that states are permitted to establish higher standards could embolden other states to adopt similar laws and will cause broker-dealers to have to monitor the standard of care in each jurisdiction where they operate, as opposed to adhering to a single standard,” the K&L Gates attorneys wrote.
James Tierney, who researches securities law at the Chicago-Kent College of Law, said on a recent webcast held by the Institute for the Fiduciary Standard that the ruling in Massachusetts “is an important recognition by a state Supreme Court that state regulators have an important role to play in a federal system to level up regulatory obligations and duties when it seems like the federal government is not doing enough.”
The ruling, according to Tierney, a former SEC attorney, is also “somewhat of a recognition that Reg BI, for all its benefits, has a lot of warts both in its design and implementation.”
The court’s decision “is instrumentally useful for advocates of stronger fiduciary protections in investment advice to make that case,” Tierney said.