A Progressive State’s Fiduciary Showdown With the SEC

With a deadline of 5 p.m. January 7th for submitting comments to the Massachusetts Securities Division of the Office of the Secretary of the Commonwealth regarding its proposed uniform fiduciary conduct standards for advisers and brokers, the agency held a public hearing, at which both support and opposition to the proposed fiduciary standard was voiced.

By way of background, Massachusetts Secretary of the Commonwealth William Galvin recently signed off on the forthcoming proposal of a rule that would impose a fiduciary conduct standard for broker/dealers, agents, investment advisers and investment adviser representatives providing financial advice to clients in the Commonwealth. At that time, Secretary Galvin said his approval of the rulemaking process allowed for a formal (though short) comment period and then for the actual rule text to be promulgated.

Since that development in December, several dozen comment letters have been received and published on the Securities Division website. The vast majority of the published comments are critical, though many of these negative responses use identical language seemingly provided by a third party, the National Association of Insurance and Financial Advisors. Still, other letters are unique.

One clear theme to emerge in the skeptical letters from broker/dealers and insurance agents is vexation that Massachusetts would continue down the path towards a uniform fiduciary standard while at the same time the U.S. Securities and Exchange Commission (SEC) is implementing a national set of standards that treats fiduciary “advisers” differently from broker/dealers and other sales-focused entities. For their part, some fiduciary advisers and consumer advocates have commented that a uniform fiduciary standard is required to alleviate investor confusion and ensure the best interest of investors is kept front and center by all types of financial services professionals.

One comment letter summarizes the skeptical argument nicely: “The SEC’s recently adopted Regulation Best Interest (Reg BI) establishes a workable national best interest standard of conduct that provides a significant strengthening of the standard of care for broker/dealers and their representatives while also preserving the existing business models (advisory and brokerage) that consumers want and need. In addition, the National Association of Insurance Commissioners is in the final stages of amending its model regulation on annuity recommendations and sales to include a best interest standard that aligns well with the SEC’s Reg BI.”

State-based fiduciary rule skeptics say these national regulatory actions by the SEC and the NAIC will accomplish both the regulator and industry goal of protecting clients while also preserving a business model that is appropriate for brokers, agents and advisers.

The same comment letter restates another frequently cited argument among skeptics of state-based uniform fiduciary standards: “Since most fee-only advisers have minimum asset requirements of $250,000, $500,000 or more, small and mid-level investors will lose access to financial products as well as the advice and services of financial professionals. Where will these consumers get needed advice and service from? Even if firms expand their offerings consumers will now need to pay for an ongoing fiduciary obligation that they may not want or need to pay for.”

Another comment letter speaks about a larger concern that individual state regulations will create a patchwork of inconsistent, conflicting or duplicative rules that will significantly impair consumers’ access to valuable financial products and professional assistance.

“Perhaps more than any other industry,” the letter argues, “the securities markets are national or global in nature. There are hundreds of millions of investors, hundreds of thousands of financial advisers, and tens of thousands of investment products, all operating in the same markets with the goal of generating investment returns. As the Division deliberates on whether and how to move forward, we respectfully urge that it consider how the proposal fits within the broader scheme of regulations governing the conduct of financial professionals.”