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Massachusetts Finalizes State Fiduciary Rule

Secretary of the Commonwealth William Galvin has filed regulations to impose a fiduciary conduct standard in Massachusetts.

Secretary of the Commonwealth William Galvin has filed regulations to impose a fiduciary conduct standard in Massachusetts. The new regulations will go into effect on March 6, 2020.

The regulations will apply a fiduciary conduct standard to broker-dealers and agents when dealing with their customers, and failure to adhere to the fiduciary standard “will be deemed a dishonest or unethical practice.” The Massachusetts Securities Division will begin enforcing the new regulations on September 1, 2020.

Among the provisions included in the new regulations is a prohibition on all sales contests, which the Massachusetts Securities Division said is a repeated cause of harm to investors. The rule claims to go beyond the SEC’s regulations, which bans only those contests which are product-specific or limited to particular securities in particular time periods.

A version of the new state regulations was originally made public by Massachusetts Securities Division in July of 2019, when it held a preliminary comment period on draft regulations. A formal comment period and public hearing was held on amended regulations in January. Changes made to the final regulations reflect the feedback provided by members of the public and industry during the comment periods.

“Since the SEC has failed to enact a meaningful conduct rule to protect working families from abusive practices in the brokerage industry, it has been left to my office to apply a real fiduciary standard on broker-dealers and agents in Massachusetts,” Galvin said. “Enacting this rule will provide stronger protections for Massachusetts investors, by imposing a heightened duty of care and loyalty on broker-dealers and agents.”

The Securities and Exchange Commission’s Regulation Best Interest claims to go beyond the current 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 BI 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 also plans to introduce a new fiduciary rule, although its December 2019 deadline has since passed, after the previous version was vacated by the Fifth Circuit Court of Appeals in 2018.

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