ET TU, MASSACHUSETTS? SECRETARY GALVIN ANNOUNCES INTENTION TO CRAFT FIDUCIARY RULE. Following the leads of Connecticut, Maryland, Nevada, and New Jersey, Massachusetts announced its intention to move ahead with its own fiduciary rule. And New Jersey is pressing forward with its proposed changes. We reported in SAA 2019-22 (Jun. 5) that the SEC voted 3-1 to approve Regulation Best Interest (Reg BI) and three related proposed regulations at an open meeting held June 5. Specifically, the SEC published on its Website the revised Reg Best Interest, the Final Rule - Form CRS Relationship Summary and Form ADV Amendments, forms, and interpretations (Standard of Conduct for Investment Advisers and Broker-Dealer Exclusion). We noted in our coverage that some States -- Maryland, Nevada, Connecticut and New Jersey -- have nevertheless moved ahead with their own fiduciary rules or laws. The Massachusetts Securities Division announced on June 14 that the Commonwealth will be joining this group. Secretary Frances Galvin on that date issued a Preliminary Solicitation of Public Comments: Fiduciary Conduct Standard for Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives, seeking “preliminary comment [on] a regulation to apply a fiduciary conduct standard on broker-dealers, agents, investment advisers, and investment adviser representatives when dealing with their customers and clients, respectively.” Why do this, given the SEC’s issuance of a final rule? Says the Notice: “The SEC's Regulation Best Interest fails to define the key term ‘best interest,’ and sets ambiguous requirements for how longstanding conflicts in the securities industry must be addressed under the new rule. The SEC rule also fails to indicate whether some of the most problematic practices in the securities industry would be prohibited under the new rule. For instance, while the SEC's adopting release for Regulation Best Interest indicated that sales contests limited to specific products or product types would be contrary to that rule, it did not indicate that broader-based sales contests or quotas would be contrary to its requirements.” Comments are due by Friday, July 26, 2019 at 5:00 p.m.
Speaking of New Jersey…
We reported in SAA 2019-15 (Apr. 17) that the New Jersey Bureau of Securities on April 15th published 51 N.J.R. 493(a), seeking public comments on Fiduciary Duty of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives. As described in a Summary: “In order to better protect the public interest and, in particular, New Jersey’s investing public, the New Jersey Bureau of Securities (Bureau) is proposing new N.J.A.C. 13:47A-6.4 to establish, by regulation, the common law fiduciary duty and apply it to broker-dealers and agents, and to codify it for investment advisers and investment adviser representatives. The Bureau believes that the proposed new rule is necessary to ensure that persons involved in the securities markets are uniformly held to a high standard in their dealings with the general public and is necessary to ensure the welfare of New Jersey investors.” The comment period was to have expired on June 14, but InvestmentNews reported on June 17th that the State has extended the deadline to July 18, and will be holding a hearing the day before.
In the meantime, we see that SIFMA and several other industry groups submitted a joint comment letter opposing the proposed amendment. The writers’ core recommendation? “[W]e urge the Bureau to pause its rulemaking process, review Reg BI, and reevaluate its Proposal before deciding whether it is necessary to proceed with an additional state regulation. Doing so would give the Bureau an opportunity to determine if there are material gaps between Reg BI and the Bureau’s proposed regulation. This is especially critical, as the creation of overlapping, duplicative or potentially conflicting requirements could create serious issues for the industry – particularly if such rules go into effect across multiple states, which would likely lead to increased investor confusion and undermine the intent of federal law.” SIFMA submitted its own comment letter along the same lines. Several investor and consumer rights groups sent a June 14 letter strongly supporting the proposed changes: “Several aspects of the Bureau’s proposal are vastly more protective of investors than corresponding provisions in Regulation Best Interest. These include the provisions in the proposal that would apply a uniform fiduciary standard across an appropriately broad range of advisory activities. They also include the specific formulation of the fiduciary standard, which would ensure that brokers’ and adviser’s advisory activities alike are not tainted by conflicts of interest, to investors’ detriment.”
The 800-Pound Gorilla
Every time we’ve reported on State efforts to move ahead with their own fiduciary rules or laws, we’ve queried the potential preemptive effect of the SEC’s eventual rule. Reg BI addresses this issue directly: “We note that the preemptive effect of Regulation Best Interest on any state law governing the relationship between regulated entities and their customers would be determined in future judicial proceedings based on the specific language and effect of that state law. We believe that Regulation Best Interest, Form CRS, and the related rules, interpretations and guidance that the Commission is concurrently issuing will serve as focal points for promoting clarity, establishing greater consistency in the level of retail customer protections provided, and easing compliance across the regulatory landscape and the spectrum of investment professionals and products.” A footnote observes that “the preemptive effect on any state law would be determined in future judicial proceedings, and would depend on the language and operation of the particular state law at issue.”
(ed: *We continue to think potential federal preemption of these State initiatives looms large. **We will analyze the New Jersey comment letters in a future Alert. ***Comments on the Massachusetts proposal can be emailed to email@example.com; faxed to 617-248-017; or mailed to Office of the Secretary of the Commonwealth, Attn: Proposed Regulations – Fiduciary Conduct Standard, Massachusetts Securities Division, One Ashburton Place - Room 1701, Boston, MA 02108. ****Reg BI and related materials have not yet been published in the Federal Register. The rules and forms will be effective 60 days after publication, while the interpretations will be effective immediately upon publication.)