SIFMA provides comments to the Massachusetts Securities Division on the Massachusetts Securities Division’s Proposed Fiduciary Conduct Standard for Broker-Dealers, Agents,…
Via e-mail: [email protected]
January 6, 2020
The Honorable William Francis Galvin
Office of the Secretary of the Commonwealth
Attn: Proposed Regulations – Fiduciary Conduct Standard
Massachusetts Securities Division
One Ashburton Place, Room 1701
Boston, MA 02108
Dear Secretary Galvin:
We the undersigned trade associations appreciate the opportunity to comment on the Massachusetts Securities Division’s (“the Division”) Proposed Fiduciary Conduct Standard for Broker-Dealers, Agents, Investment Advisers, and Investment Advisor Representatives (“Proposal”) dated December 13, 2019. We collectively represent a broad cross section of the financial services industry, and many of our members do business and serve retail investors, state and local governments, corporations, and institutional investors in the Commonwealth.
We are writing to express our serious concerns with the Proposal as currently drafted. Many of the undersigned commented on the Division’s Preliminary Solicitation of Public Comments, dated June 14, 2019 in a joint submission as well as individually. While we appreciate the Division’s attempt to address some of the identified problems, many concerns remain. Additionally, some of the revisions raise new, and in some cases even more troubling, issues.
While many of us are again sending separate letters, we thought it was important to highlight some universal concerns and to strongly encourage you not to finalize the Proposal at this time. Specifically, we urge you to consider the following:
1. Massachusetts investors would face higher costs and more limited opportunities under the Proposal. The Proposal would create Massachusetts-specific standards that are substantively different from national standards as well as those of every other jurisdiction. The different standards and requirements, aside from causing confusion, will inevitably contribute to higher costs and fewer options in terms of advice, products and services. In fact, it is likely that many products and services that have effectively provided Massachusetts investors with financial security and helped them build wealth over years and decades will no longer be affordable or available.
2. It is premature for the Division to characterize Regulation Best Interest’s heightened standard as insufficient. As you know, in June of 2019, the Securities and Exchange Commission (“SEC”) adopted Regulation Best Interest (“Reg BI”) which creates a new nationwide, heightened standard of conduct for broker-dealers (“BDs”) and their representatives when dealing with retail customers. In its Request for Comment, the Division states that “Reg BI fails to provide investors the protection they need from harmful conflicts of interest.” We strongly disagree. In our view, Reg BI provides substantial and meaningful investor protection, and the heightened standard impacts nearly every aspect of a BD’s operation. We respectfully suggest that, since Reg BI is not yet fully operational, it is at least premature to characterize the years-long federal effort as insufficient. We would strongly encourage you to wait until Reg BI is fully operational and the SEC, FINRA and state regulators begin examining for compliance before finalizing a potentially unnecessary, state-specific standard which conflicts with the federal rule.
3. Any proposal should make clear that it does not apply to SEC-Registered Investment Advisers (“IAs”) and their Representatives (“IARs”). Unlike the Preliminary Solicitation, the Proposal seems to suggest that federal covered advisers are appropriately excluded from this Proposal. We would appreciate clarification of that fact. We respectfully ask for similar clarification that the Proposal does not apply to IARs of federal covered advisers. The Massachusetts Securities Act defines “investment adviser representative” to include employees or persons of federal covered advisers “subject to the limitations of section 203A of the Investment Advisers Act of 1940.” While Massachusetts has the authority to bring enforcement actions for fraud and deceit, such authority is substantially different than imposing substantive conduct requirements on employees or persons of federally covered advisers.
4. An ongoing monitoring requirement is inconsistent with the brokerage model and will likely limit consumer choice. The Massachusetts proposal would impose a broad and ongoing fiduciary duty obligation on BDs, IAs and their agents if, among other things, they use any of a wide range of common titles, they receive “ongoing compensation” from the client, or the customer has a “reasonable expectation” that an account is being monitored. While we have specific concerns with each of these components, an ongoing monitoring requirement is inconsistent with the brokerage model. Moreover, as the SEC noted, such a duty may not be consistent with the “solely incidental” prong of the BD exclusion from the definition of investment adviser.
Any ongoing duty would likely result in firms limiting or eliminating brokerage services. Clients would then likely have to choose between moving to more expensive fee-based advisory accounts or moving to internet or call center-based execution-only platforms. To avoid this outcome, we again recommend that the Proposal limit the duration of the fiduciary duty to the point in time a recommendation is being made.