The Insured Retirement Institute (IRI) is urging the Massachusetts Securities Division to delay action on a proposed state regulation governing professional financial advice to consumers.
The Massachusetts Securities Division is seeking comment on a regulation to apply a fiduciary conduct standard on broker-dealers, agents, investment advisers, and investment adviser representatives when dealing with customers and clients. The standard requires that recommendations and advice be made in the best interest of customers and clients without regard to the interests of the broker-dealer or advisory firm. It allows for the payment of transaction-based remuneration.
It is similar to the U.S. Department of Labor’s Fiduciary Rule, which was overturned and replaced with the SEC Regulation Best Interest. State officials say the SEC’s Regulation Best Interest fails to define the key term “best interest,” and sets ambiguous requirements for how conflicts in the securities industry must be addressed under the new rule. They say it also fails to indicate whether some of the most problematic practices in the securities industry would be prohibited under the new rule.
“In many instances, it appears that the mitigation of conflicts required under the SEC Regulation Best Interest can be accomplished through disclosure, including disclosure via the new Customer Relationship Summary,” MSD officials state. “This approach contradicts years of data gathered by studies and reports on disclosure and the conduct standards applicable to broker-dealers.”
IRI, which represents the retirement income industry, said the state should wait to see if the new Regulation Best Interest rule leaves any gaps in investor protections. IRI asserts that Regulation Best Interest will address the state’s concerns. Further, IRI called the Massachusetts proposal inconsistent and incompatible with the SEC rules. Further, the group called the proposal “misguided,” adding that it could make it more difficult for some financial services firms to do business in the state.
“For the Division to create a separate regulatory structure that destroys the distinction between brokerage and advisory services is, at its best, misguided, and at worst, contrary to and incompatible with the Final SEC Rules,” Jason Berkowitz, IRI chief legal and regulatory affairs officer, wrote in a comment letter to the Mass Securities Division. “By rejecting the SEC’s approach, the Division threatens to create a regulatory labyrinth for broker dealers (BDs) offering services in Massachusetts. BDs will not only have to comply with the Final SEC Rules but also the Division’s more expansive and inconsistent rules.”
Berkowitz added that there are several vague and confusing elements to the rule.
“The proposed rule includes a number of open-ended, ill-defined and unworkable provisions would make it nearly impossible for broker-dealers to know with any degree of certainty that they are complying with the rule,” Berkowitz said. He added that the proposal’s duty of loyalty provision creates an “impossible” standard” for broker dealers and should be revised. Also, he called the duty of loyalty provision “among the most problematic and unworkable aspects of the proposal.”
IRI also warned that the Massachusetts rule could be pre-empted because it is in direct conflict with the SEC’s regulation best interest.
“The Proposal would undermine the SEC’s attempt to create a federal standard for broker-dealers to follow when making personalized investment recommendations to retail customers,” Berkowitz said. “Allowing each state to promulgate separate and potentially inconsistent standards for broker-dealers would create a patchwork regulatory structure that would be detrimental to investors and to the industry.”
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