Every day, thousands of financial services professionals across the country go to work to help people save for big life events such as buying a house, starting a family, sending kids to college, and saving for retirement.

New regulations being considered in several states and most immediately by the Massachusetts Securities Division would put that relationship at risk.  Retail investors in the United States have the benefit of a robust and competitive market for investment advisory services.  Most investment firms serving retail customers provide both brokerage and investment advisory accounts, and even then, different levels of service offerings from total asset management to DIY web-based brokerage. Traditional brokerage services are different from investment advisory in both level of service and cost and provides access to affordable advice and are an important option for Massachusetts savers, and savers across the nation.  This is particularly important for buy- and-hold investors and for investors with more modest resources, who are not seeking to trade in and out of securities on a regular basis.

The regulations being debated in Massachusetts this week, though well intentioned, will negatively affect the ability of financial professionals to provide brokerage services.  The regulations will, among other things, limit the ability for investors to obtain advice on a transactional basis, likely resulting in clients having to choose between purchasing full service advisory they previously chose not to purchase, or lose access to advice.

Savers who don’t meet the minimum asset requirements will likely lose access to both personal investment advice and to specific investment products.  Savers who satisfy the asset requirements will end up having to purchase more services, at a greater cost, than they need or want.  We saw many of these same negative impacts when firms started working to implement the now defunct Department of Labor (DOL) fiduciary rule.  A 2017 study by Deloitte & Touche found that access to brokerage advice services would have been eliminated or limited by many financial institutions as part of their approach for complying with the DOL rule.  This included directing clients to call centers for execution only services with no human interaction, narrowing the platform of investments products available to retirement investors, in some cases making mutual funds and index funds unavailable, and shifting clients into fee based advisory accounts.

The proposal would also negatively impact the state’s municipal and corporate markets. It could restrict the ability for firms to conduct principal transactions with retail broker-dealer clients.  In the municipal bond market, trades done on a principal basis are the most common form of trading.  Principal transactions also cover underwriting activities where a broker-dealer is part of an underwriting syndicate for municipal or corporate bond offerings or for equity offerings (including IPOs). Many municipal issuers, including many in Massachusetts, require underwriters to give preference to local retail investors through a so-called retail order period. This provides a steady investor base to the issuer, and efficient pricing to the investor.  Without further clarification, many broker-dealers acting as an underwriter will not be able to distribute such offerings to retail clients as an underwriter. This will likely depress Massachusetts issuers’ access to a broad retail investor base affecting the price of their securities while increasing the cost to such investors.

Regulators in Massachusetts have stated that this proposal is needed to raise the standard of conduct for broker-dealers providing investment services, notwithstanding the fact that the US Securities and Exchange Commission did just that last year with the adoption of Regulation Best Interest.

In June of 2019, after years of debate, study and analysis, the SEC adopted Regulation Best Interest, which mandates a new, nationwide, heightened standard of conduct for broker-dealers.  In his comments introducing the final rule, SEC Chairman Jay Clayton recognized both the importance of a heightened standard and the value of the brokerage model, noting that a single standard of conduct for financial professionals would be a “loss for our Main Street investors” as it “likely would reduce investor choice and access to products and services and increase costs.[1]”

Reg BI substantially raises the bar from existing FINRA suitability standards and adds meaningful new investor protections including the requirement to put the client’s interests first and mitigating or eliminating material conflicts of interest.  It provides significant and material changes to the way brokerage services will be provided and impacts nearly every aspect of a broker-dealer’s operations.

Massachusetts, and regulators in other states considering such a proposal, should give Reg BI time to see how it works in practice before considering a state-specific action. The state may just find that their concerns have been appropriately addressed without the need for overlapping regulations that have the potential to increase the costs and limit the choices for Massachusetts’ savers and investors.

Kenneth E. Bentsen, Jr. is president and CEO of SIFMA, the voice of the nation’s securities industry. He is also CEO of the Global Financial Markets Association (GFMA), of which SIFMA is the U.S. regional member.

Additional Resources:

SIFMA President and CEO Kenneth E. Bentsen, Jr. testified on this topic at a hearing on January 7^th – please see the full testimony and SIFMA’s recent comment letter which further outline our views.

SIFMA also joined 12 financial services trade associations in a comment letter echoing these concerns and highlighting key problems with the draft regulations. That letter can be found here.

In July 2019 SIFMA filed a comment letter on the Massachusetts fiduciary rule proposal.