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Massachusetts Securities Division Rolls Out Final Version of Fiduciary Duty Rule

The Massachusetts Securities Division (the “Division”) has announced that they will begin to apply a fiduciary conduct standard to broker-dealers and agents when dealing with their customers. Once adopted, the Division has stated that the failure of a broker-dealer or agent to adhere to the fiduciary conduct standard of utmost care and loyalty when dealing with their customers shall be deemed a dishonest or unethical practice pursuant to the Massachusetts Securities Act.[1] The heightened standard, as compared to the SEC’s Regulation Best Interest Rule (“Reg. BI”), is to be adopted on March 6, 2020. The Division’s enforcement of the new fiduciary standard shall begin on September 1, 2020.

In doing so, the Division is adopting amendments to 950 MASS. CODE REGS. 12.200 (the “Regulations”) as they relate to the standard of conduct applicable to broker-dealers and agents. The adopted amendments to the Regulations (the “Final Regulations”), revise certain paragraphs in Section 12.204 to make clear that the existing suitability standard still applies to any relationships or transactions expressly excluded from the fiduciary conduct standard.[2] 

Both regulators and the plaintiffs’ bar have argued that Reg BI does not go far enough to protect investors, particularly because it does not confer a fiduciary designation onto broker-dealers. Massachusetts addresses this criticism with the implementation of the new standard, which obligates broker-dealers and agents to give recommendations and advice “without regard to the financial or any other interest of any party other than the customer.” In addition, this rule obligates broker-dealers and agents to disclose, avoid, eliminate and mitigate any conflicts of interests. The new rule specifically states that disclosing conflicts alone does not meet or demonstrate the duty of loyalty.

This, of course, comes nearly two years after the U.S. Court of Appeals for the Fifth Circuit struck down the Dept. of Labor’s attempt to expand ERISA’s fiduciary standards, arguing that the government overreached by requiring broker-dealers to act in their clients’ best interest.[3] In the adopted amendments, the Division states that the higher standard does not apply to fiduciaries under ERISA.

Massachusetts’ strict fiduciary standard will have a significant impact on licensed broker-dealers and agents in the state. It creates a higher standard for those broker-dealers and agents licensed in Massachusetts, as opposed to the SEC’s Reg BI. In doing so, it raises concerns regarding a different regulatory landscape applied to broker-dealers and agents in Massachusetts, as opposed to other states. An important question that remains unanswered is whether Reg BI will preempt individual state efforts to change the legal obligations of a broker-dealer in their respective state. The SEC has not provided guidance on the issue.


[1] See M.G.L. c. 110A, § 204(a)(2)(G).

[2] See Amendments to Standard of Conduct Applicable to Broker-Dealers and Agents – 950 Mass. Code. Regs. 12.200, Massachusetts Securities Division, available at https://www.sec.state.ma.us/sct/sctfiduciaryconductstandard/fiduciaryrule-adoption.htm.

[3] See Fifth Circuit Court of Appeals Invalidates the 2016 Final Department of Labor Fiduciary Rule and Related Prohibited Transaction Exemptions, available at https://www.mintz.com/insights-center/viewpoints/2226/2018-04-fifth-circuit-court-appeals-invalidates-2016-final.

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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.
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.
Jason L. Burrell is a Mintz attorney who focuses on commercial litigation, securities matters, government investigations, and enforcement proceedings. He was a Mintz Summer Associate in 2017 and 2018.

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.