Although a pending Massachusetts investment advice rule is likely to be challenged in court on the grounds that it conflicts with a federal standard for brokers, it has been written in such a way as to avoid a similar conflict with investment advisers.
The Massachusetts rule would impose fiduciary duty on financial advisers in the state: brokers and investment advisers. But it makes clear that it wouldn’t apply to Bay State investment advisers who are already registered with the Securities and Exchange Commission.
Under the Dodd-Frank financial reform law, investment advisers with more than $100 million in assets under management are overseen by the SEC. Smaller investment advisers fall under state jurisdiction.
Investment advisers are already held to a fiduciary standard. Karen Barr, CEO of the Investment Adviser Association, said that advisers regulated by the SEC should not also be regulated by individual states.
“[Federal] preemption with respect to SEC-registered advisers is very clear,” Ms. Barr said.
She said the National Securities Markets Improvement Act of 1996 says that investment advisers should not be subject to duplicative rules for federal and state regulation.
After the IAA and other trade associations pointed out in a July comment letter that the preliminary Massachusetts fiduciary proposal was unclear about whether it applied to SEC advisers, the state changed the language to clarify that it affected only state advisers.
“By using the term investment adviser (rather than just adviser) throughout the document, the formal rule proposal presumably triggers the state definition of investment adviser, which excludes federal covered advisers,” Kenneth E. Bentsen Jr., president and chief executive of the Securities Industry and Financial Markets Association, wrote in a Jan. 6 comment letter.
The federal securities law is not as clear when it comes to preemption regarding broker regulation, which is likely to be at heart of lawsuits against fiduciary rules promulgated by Massachusetts and other states.
Massachusetts
Would impose fiduciary duty on state’s brokers covering recommendations involving investment strategies, account openings and purchases of securities, commodities and insurance products. Under the proposal, financial advisers would have to act without regard to their own or their firms’ financial interests.
Ongoing fiduciary duty is easier to trigger than it is under the Securities and Exchange Commission’s Regulation Best Interest. Brokers would have to provide ongoing fiduciary duty if they use a title such as adviser, manager, consultant or planner in conjunction with financial, investment, wealth, portfolio or retirement.
Preproposal introduced: June 2019
Proposal introduced: December 2019
Final rule: TBD. The proposal may be modified based on comment letters the state received last month on the proposal and on testimony given at a Jan. 7 hearing.
New Jersey
Would impose fiduciary duty on state’s brokers covering recommendations involving investment strategies, account openings and purchases of securities. It would require brokers to provide recommendations without regard to their own or their firm’s financial interests. They also would have to recommend the best reasonably available investment for their customers.
Proposal introduced: April 2019
Comment deadline: July 2019
Final rule: TBD. The New Jersey Securities Bureau must promulgate a final rule within one year of the release of the proposal. The deadline can be extended if major revisions are made to the proposal.
Nevada
Would impose a fiduciary duty on state’s brokers. It would prohibit brokers from placing their interests ahead of their customers’ interests, which is similar to the requirement found in the SEC’s Reg BI. The rule places limitations and obligations on the use of titles including adviser, financial planner and wealth manager.
Under the rule, financial professionals who are dually registered as brokers and investment advisers would be considered investment advisers at all times and would have to adhere to fiduciary duty.
Law enacted: July 2017
Draft regulations released: January 2019
Final rule: TBD.
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