On September 1, 2020, Massachusetts’ new fiduciary conduct standard went into effect. In March 2020, Massachusetts became the first state in the country to fully adopt this heightened standard for broker-dealers. The regulations are the result of consumer-oriented Massachusetts Secretary of State Bill Galvin’s opinion that the SEC’s Regulation Best Interest (Reg BI) is insufficient to protect Massachusetts residents from alleged abusive practices. Although Reg BI was intended to federally codify FINRA’s suitability standard in the wake of the vacated Department of Labor fiduciary standard, it did not go far enough for Galvin. The Reg BI standard holds that a “broker shall act in the best interest of the customer at the time of a recommendation involving investment products, strategies or account changes (i.e. rollovers) is made, without placing the interests of the firm ahead of the customer.”
The new Massachusetts regulations essentially hold broker-dealers (now in addition to investment advisors) and their agents to a fiduciary duty of care and loyalty in the sale of securities. A major change is the language regarding the duty of loyalty as it is much broader than Reg BI and states that a broker-dealer “make all reasonably practicable efforts to avoid conflicts of interest, eliminate conflicts that cannot reasonably be avoided, and mitigate conflicts that cannot reasonably be avoided or eliminated and make recommendations and provide investment advice without regard to the financial or any other interest of any party other than the customer.” [emphasis added]. The regulations further specifically address disclosure of conflicts and limit sales contests.
Similar to Reg BI, the Massachusetts regulations apply only to advice made in connection with the recommendation of a security to a customer (and not commodities and insurance products) and, expressly, (1) if a broker has discretionary authority over an account; (2) where a contract with the customer mandates a fiduciary standard; or (3) there is a contractual obligation to monitor a customer’s account on a regular or periodic basis, as such regular or periodic basis is determined by agreement with the customer The Massachusetts Securities Division has clarified the third duty by stating “duration of the fiduciary duty is determined by the agreement with the customer. For example, if the agreement with the customer is to monitor the account four times a year, the fiduciary duty will commence and end each quarter period when the review is performed.”
Different from Reg BI, the Massachusetts regulations do not state that titles (such as financial consultant or advisor) are a trigger for imposition of a fiduciary duty. The Massachusetts regulation is also less precise relative to sales contests and states that “It shall be presumed to constitute a breach of the duty of loyalty for a broker-dealer or agent to recommend any investment strategy, the opening of or transferring of assets to a specific type of account, or the purchase, sale, or exchange of any security, if the recommendation is made in connection with any sales contest.”
The revised Massachusetts regulations now define the duty of care as “the care, skill, prudence, and diligence that a person acting in a like capacity and familiar with such matters would use, taking into consideration all of the relevant facts and circumstances…including the risks, costs, and conflicts of interest related to all recommendations made and investment advice given, the customer’s investment objectives, risk tolerance, financial situation, and needs and any other relevant information.”
The regulations also make clear that the existing suitability standard still applies to any relationships or transactions expressly excluded from the fiduciary standard. Failure to adhere to the fiduciary standard of utmost care and loyalty will be deemed a dishonest or unethical practice under M.G.L. c. 110A, § 204(a)(2)(G).
If you have any questions or would like additional information regarding this development, please contact any one of the following partners at Winget Spadafora & Schwartzberg, LLP who are leading the firm’s effort in the representation of broker-dealers, financial advisors and investment advisers across the United States.