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Massachusetts Securities Division Begins Enforcement Of New State Fiduciary Conduct Standard

On September 1, 2020, the Massachusetts Securities Division (“MSD”) began enforcing a new state regulation that holds all broker-dealers and their agents to a fiduciary conduct standard requiring them to “make recommendations and provide investment advice without regard to the financial or any other interest of any party other than the customer”.  Massachusetts becomes the first state to implement its own fiduciary standard in light of the implementation of Regulation Best Interest (“Reg. BI”) by the SEC on June 30, 2020.  The commencement of active MSD enforcement oversight shines a spotlight on compliance personnel as they ascertain how to best supervise broker-dealers and  agents registered in MA under this new standard. (Significantly, even  out of state firms and registered representatives are charged with adhering to the new regulation if they are dealing with Massachusetts residents.) 

The MSD has long been in favor of a stronger fiduciary standard applying to all broker-dealers, investment advisors and their agents when servicing  Massachusetts clients, regardless of their status or title.  The MSD previously made this clear in its letter to the SEC in August 2018, opining that the then proposed Reg. BI did not go far enough to protect Main Street investors.  The biggest concern for the MSD has always been the potential  conflict of interest that may arise when a registered representative makes any recommendation to a client to purchase or sell a security. 

It now remains to be seen how aggressive the MSD will be in the enforcement of this new fiduciary standard.  The initial regulations proposed by the MSD were to apply to broker-dealers and investment advisors (and their agents), and also included references that the proposed regulations were applicable to commodities and insurance products as well.  However, in the comment process, the proposed regulations were amended.  For example, the issue was raised that  annuities and insurance products are excluded from the definition of “security,” as defined in M.G.L. c. 110A, § 401(k).  Therefore, the proposed changes by the MSD should be limited only to securities. In response, the MSD removed the express language covering advice related to commodities and insurance products from the final version of the new fiduciary conduct  standard.  In addition, the MSD amended the final version to apply to broker-dealers and their agents, and not to investment advisors.  The amended final fiduciary conduct standard can be found here

Regardless of the changes to the final rule, given our past experiences with the MSD,  we expect that the Staff will be aggressive in the enforcement of the new fiduciary conduct standard in order to define the limits of  both permissible conduct and products going forward.  Indeed, if past actions by the Staff in connection with the rollout of new securities regulations are any guide, we would expect to see the MSD soon send subpoenas to a wide sweep of investment firms doing business in the Commonwealth,  seeking documents related to compliance with the new fiduciary conduct standard.  We would also expect to see MSD Enforcement file actions shortly thereafter.

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Authors

Pete S. Michaels

Member / Co-Chair, Financial Services Practice

Pete S. Michaels is a Mintz attorney who focuses his practice on securities litigation, regulatory proceedings involving financial service companies and products, and compliance matters. He represents financial services firms and insurance companies and their employees, directors, and officers.
David L. Ward is a Mintz attorney whose practice includes financial services regulatory matters, internal investigations, and securities-related litigation in state and federal courts. He represents financial services clients before the US Department of Justice, SEC, FINRA, and other regulators.
Michael E. Pastore is a Mintz attorney who represents banks, financial services, and other companies in litigation and government proceedings involving consumer protection and other laws. He also handles arbitrations and guides clients through government and internal investigations.