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ADISA Comments on Massachusetts Proposed Fiduciary Regulations

The Alternative and Direct Investment Securities Association has submitted a letter to the Massachusetts Securities Division in response to their request for comments on proposed regulations that would impose a uniform fiduciary conduct standard.

The Alternative and Direct Investment Securities Association has submitted a letter to the Massachusetts Securities Division in response to their request for comments on proposed regulations that would impose a uniform fiduciary conduct standard on broker-dealers, agents, investment advisers, and investment adviser representatives when dealing with their customers and clients in the state.

ADISA’s letter, which can be read in its entirety here, was signed by 2019 president Greg Mausz and drafted by John Grady and Thomas Rosenfield of the group’s legislative and regulatory committee.

Grady plans to speak on behalf of ADISA at the Massachusetts Securities Division public hearing on the proposed amendments in Boston on January 7th.

“We are mindful of the need to create clear and comprehensive standards for application to the financial advisory industry, so that retail customers can plainly understand the obligations that their financial professionals owe them,” the letter stated. “At the same time, we wish to help ensure that said financial professionals can align their conduct involving alternative investments with the requirements of the regulation, and to that end support clear line-drawing in the regulation.”

ADISA cited a Natixis Global Asset Management Survey that claims that 78 percent of millennials and 70 percent of Generation X savers endorse having access to alternatives for their investment accounts. The trade group also noted that these products have had a positive impact on investor rates of return when incorporated into more traditional and more liquid portfolios.

ADISA’s comment letter encourages the Massachusetts Securities Division to consider the following:

  • “Non-traded” investment products are distinct from their publicly-traded counterparts and are typically marketed and sold in a different way.
  • The Division should add greater clarity to the scope and application of the duty of due care and should clarify the “best of” language.
  • The proposal should explicitly limit its application to retail investors who are legal residents of Massachusetts or who reside in Massachusetts.

The Massachusetts proposed fiduciary standard is based on the common law fiduciary duties of care and loyalty and would require financial professionals to make recommendations and advice “based on what is best for the customers and clients, without regard to the interests of the broker-dealer, advisory firm, and its personnel.” The regulation would also apply to municipalities and pension plans, as well as individual investors.

Massachusetts Secretary of the Commonwealth William Galvin previously said that the division was “proposing this standard because the SEC has failed to provide investors with the protections they need against conflicts of interest in the financial industry with its Regulation Best Interest rule.”

The SEC’s Regulation Best Interest claims to go beyond the suitability standard and requires broker-dealers to act in the best interest of their retail customers when making an investment recommendation of any securities transaction or investment. The SEC also requires brokers to provide clients with a standardized disclosure document about the nature of their relationship.

Opponents of Regulation Best Interest argue that it does not define the “best interest” of the customer and exacerbates existing confusion among investors who are unsure about the standards their broker must observe, while proponents believe that the rule establishes a national standard that helps protect investors while preserving access to professional financial advice.

The Department of Labor said that it plans to introduce a new fiduciary rule after the previous version was vacated by the Fifth Circuit Court of Appeals in 2018.

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