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Broker-Dealer Rule Triggers Clash on Beacon Hill

January 07, 2020

A proposal aimed at protecting investors encountered pushback Tuesday from financial services firms and trade groups who argued the changes would instead reduce choice and access for consumers, particularly those with low or moderate incomes.

Secretary of State William Galvin last June proposed a regulation that would apply a fiduciary conduct standard to broker-dealers, agents and investment advisers in interactions with their customers and clients. At the time, Galvin said the move was necessary because a new U.S. Securities and Exchange Commission rule "failed to provide investors with the protections they need against conflicts of interest in the financial industry."

"My Office has seen firsthand the serious financial harm that investors and savers have suffered as a result of conflicted financial advice," Galvin said in a June statement. "Investors must come first."

Galvin's office said the proposed regulation would "deem it an unethical or dishonest conduct or practice for a broker-dealer, agent, investment adviser, or investment adviser representative registered or required to be registered in Massachusetts to fail to act in accordance with a fiduciary duty to any customer or client."

At a hearing Tuesday, commenters said provisions in the regulations would discourage broker-dealers from offering their services in Massachusetts. Several speakers also urged the Securities Division to hold off on new state-level regulations until officials can gauge the impact of the SEC's new rule, which is known as Regulation Best Interest and takes effect in June 2020.

Greater Boston Chamber of Commerce President and CEO James Rooney described brokerage accounts as "a low-cost, low-barrier entry into investing and wealth-building," with advice that is often free and can help people to save for college, retirement or buying a home. He said firms that offer brokerage services may cease to do so, deciding compliance is too difficult or costly.

"For those firms that continue to offer brokerage services, the rule proposed in Massachusetts would require that broker-dealers provide the same ongoing advice and guidance as investment advisors, lumping the two into the same category even though they provide different services," Rooney said in written testimony. "Under the proposed rule clients will likely be redirected to a more expensive investment advisor model to ensure compliance or face additional fees for the costs of continuous monitoring, creating unnecessary barriers for consumers."

Fidelity Investments' Pamela Everhart said an estimated 98 percent of low- and middle-income consumers choose to open brokerage accounts "to receive point-in-time brokerage advice rather than choosing ongoing advice provided by an investment advisor for a fee."

Kent Mason of the Washington, D.C. law firm Davis and Harman said elements of the proposal would be "unworkable" for broker-dealers and said the regulatory amendments' language around avoiding, eliminating or mitigating conflicts of interest is vague.

"What's the difference between avoiding and eliminating? I don't know," he said. "If I can't avoid it or eliminate it, do I have to mitigate it? I don't know. If I have to mitigate it, how do I mitigate it? I don't know. So if someone came to me and said, 'Should we have brokerage business in Massachusetts,' I'm a lawyer, I'd say, 'You're running an enormous risk because you've got a standard that no one understands.'"

Galvin's office, in a small business impact statement dated Dec. 13, said that it's possible broker-dealers may decide not to open or expand in to Massachusetts "if they determine that being held to a fiduciary standard will be too costly or subject them to too much regulatory risk."

The impact statement said that "any potential deterrent effect on new business formation" would be "substantially outweighed" by avoiding costs associated with investors receiving conflicted financial advice and the "ample and varied" sources of financial advice that are already available here.

"Individuals and business that seek to provide financial advice, but are unable or unwilling to treat their customers and clients with the appropriate care and loyalty present a substantial risk to investors," the statement said. "The potentially catastrophic harm that can result from conflicted advice requires the rigorous approach embodied in the proposed regulations."

AARP Massachusetts, meanwhile, commended the division for its proposal, saying in written comments that all financial professionals who advise retail investors, including both broker-dealers and investment advisors, should be held to a fiduciary standard.

"Retail investors are often confused about the fact that there are different types of financial professionals that all could potentially provide similar services, but be held to different standards of conduct," state director Michael Festa and state President Sandra Harris wrote in their testimony. "Unlike institutional investors that are aided by their own financial expertise and sophistication, retail investors stand more vulnerable to exploitation by the financial services industry."

There are approximately 900 investment advisors registered in Massachusetts and 1,900 broker-dealers with at least one agent registered in the state, according to the Securities Division.

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