Massachusetts will soon enact a fiduciary standard on brokers when they make investment recommendations to customers, becoming the first state to impose such regulations.
Massachusetts Secretary of the Commonwealth William F. Galvin filed final regulations Friday that will require broker-dealers and their agents to provide investment advice and recommendations "without regard to the financial or any other interest of any party other than the customer."
The regulations take effect March 6 and enforcement will begin Sept. 1. They do not impact investment advisers, who are already held to a fiduciary standard.
Mr. Galvin proposed the regulations last year after the Securities and Exchange Commission approved its own rule package, commonly known as Reg BI, for its centerpiece best-interest standard that aims to compel brokers to put clients' financial interests ahead of their own and requires them to mitigate financial conflicts.
Among other concerns, critics say the term "best interest" is not defined in Reg BI, which opens it up to manipulation. The SEC regulation goes into effect June 30.
"Since the SEC has failed to enact a meaningful conduct rule to protect working families from abusive practices in the brokerage industry, it has been left to my office to apply a real fiduciary standard on broker-dealers and agents in Massachusetts," Mr. Galvin said Friday in a statement. "Enacting this rule will provide stronger protections for Massachusetts investors, by imposing a heightened duty of care and loyalty on broker-dealers and agents."
Massachusetts concluded a comment period on its rule last month and drew sharp criticism from the financial services industry, which says a patchwork of state regulations will cause administrative headaches.
Jason Berkowitz, chief legal and regulatory affairs officer and the Insured Retirement Institute, said his organization is reviewing the regulation to determine its potential effects. "Broadly, we remain concerned that the Massachusetts regulation will limit consumers and investors of their choice of investment professional and of products that are important to retirement planning and financial well-being," he said in a statement.
IRI has pushed states to wait for Reg BI to go into effect before considering regulations of their own.
Kenneth E. Bentsen Jr., president and CEO of the Securities Industry and Financial Markets Association, said in a statement that SIFMA looks forward "to reviewing the rule with particular attention on whether it is consistent with existing federal fiduciary and best interest standards to which our members are subject, or whether it may conflict in ways — whether intended or unintended — that would impede our members from best serving their retail clients."
Nevada and New Jersey are also eying fiduciary standards of their own, while legislators in Maryland voted down a proposed fiduciary rule last year.