The Massachusetts Securities Division of the Office of the Secretary of the Commonwealth (the "Division") proposed a fiduciary conduct standard for broker-dealers, agents, investment advisers and investment adviser representatives ("entities").
The Division-proposed amendments would:
- apply a uniform fiduciary conduct standard to entities when dealing with customers and clients in certain situations;
- deem entities who fail to comply with the fiduciary standard of utmost care and loyalty as demonstrating "unethical or dishonest conduct or practices";
- adopt a "flexible, principles-based" approach when applying the standard of conduct for entities, contingent upon the scope of the relationship with the client; and
- clarify the existing suitability standard (noting it would apply to relationships or transactions expressly excluded from the fiduciary standard).
Comments on the proposed amendments must be received by the Division by January 7, 2020.
The political momentum towards the various states adopting their own fiduciary or quasi-fiduciary standards applicable to broker-dealers making recommendations to their clients appears somewhat inexorable, even if not well advised.
It is difficult to see how the economics work for a broker-dealer to make recommendations to individual clients, get paid only a transaction commission, and be deemed to be subject to a "fiduciary standard of utmost care." See Cadwalader Memorandum: Choose One - Best Interest or Full Service. That said, this is the path on which state regulators appear determined to proceed. If this state regulatory approach is successful, the likely future is for retail investors to either get their investment advice through cost-efficient robo-advisers or to pay up for individualized investment advice. Whether this is the best result for retail investors is an open question which regulators seem to have little interest in really testing.
On the topic of open questions, the fact that regulators routinely cite to the Rand Report in making their argument that broker-dealers should be subject to the same fiduciary standard as investment advisers is simply evidence of how little evidentiary justification there is for this regulatory approach. The conclusion of the Rand Report was that while investors did not fully appreciate the different services provided by advisers and brokers, they were generally equally satisfied with the services they received from each type of provider. In short, nothing in the Rand Report justifies a change in the manner in which brokers are regulated. RAND Report: Investor and Industry Perspectives on Investment Advisers and Broker-Dealers.
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