Massachusetts finalizes its own investor protection rule. Here’s what it could mean for you

Massachusetts investors are slated to get an extra dose of regulatory protection.

But not everyone agrees that’s a good thing.

Last week, Massachusetts Secretary of the Commonwealth William F. Galvin put the finishing touches on a new fiduciary standard for broker-dealers and broker-dealer agents operating in the state.

The new regulation requires those businesses and professionals to “provide investment advice and recommendations without regard to the interests of anyone but the consumer,” according to the announcement of the news.

“This standard will protect Massachusetts retirees and their hard-earned retirement savings from conflicted investment advice, which has been shown to cost investors billions of dollars each year,” Galvin said in a statement.

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With the announcement, Galvin also took aim at the U.S. Securities and Exchange Commission, which he said has “failed to enact a meaningful conduct rule to protect working families from abusive practices in the brokerage industry.”

The SEC is in the process of moving forward on a new rule, called Regulation Best Interest, that requires broker-dealers and associated professionals to make retail investors’ best interests a priority when making recommendations.

That regulation, called Reg BI for short, went into effect on Sept. 10, 2019. But firms have until June 30 of this year to comply with the rule.

The SEC was authorized to come up with a fiduciary-type rule through the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law in 2010.

But critics, including Galvin, complain that Reg BI doesn’t go far enough to create a fiduciary standard, and the definition of best interest is too fluid.

Now, Massachusetts is taking action of its own. The state’s rule is scheduled to go into effect on March 6. But the financial industry has until Sept. 1 to comply with the rule.

That’s less time than the Insured Retirement Institute, a trade organization representing the financial industry, wanted before Massachusetts put the rule in place.

“The Division of Securities should have waited to allow the new SEC Regulation Best Interest to take effect and see if that is as effective as we believe it will be before deciding if more regulations are needed,” said Jason Berkowitz, chief legal and regulatory affairs officer at IRI.

IRI is just one of many groups that weighed with comment letters since the regulation was first proposed.

The final rule did take into account a couple of the group’s suggestions, notably striking insurance professionals from having to comply with the rule. It also removed some “more imprecise” circumstances that would trigger fiduciary status, Berkowitz said.

But industry groups who opposed the rule and advocates for tougher fiduciary standards are at odds on what the change will mean for individual investors.

“It’s a good step forward,” said Knut Rostad, president at the Institute for the Fiduciary Standard. “It’s not as much as we would have liked, but it’s a good step forward.”

Excluding insurance agents, whom many investors look to as trusted advisors, is a disappointment, Rostad said.

IRI advocated for the exclusion of those professionals — who sell everything from annuities to life insurance — because they would potentially face a conflict of answering to a best interest standard on a federal level and a fiduciary standard in the state.

“It helps to alleviate some of the pressure that might have reduced choice,” Berkowitz said.

Notably, the new regulation prohibits sales contests, which provide incentives for financial professionals to sell certain products. Galvin’s office called the practice a “repeated cause of harm to investors,” according to the release.

“That may be the most visible change,” for investors come September when the rule goes into full effect in the state, Rostad said.

But IRI cautions that the new rule could negatively affect the choices available to investors.

For example, more investors will likely have to rely on fee-based advisory accounts, even though the commission-based brokerage model might be better suited for them, Berkowitz said.

And because advisory accounts often have asset minimums, that means some lower- and middle-income individuals could be left to manage their money on their own, he said.

It could also affect investors who do not live in the state, but who work with financial professionals who are located in Massachusetts.

Nevertheless, it is unlikely the state will undo the rule, Berkowitz said.

Now, the attention turns to other states that are also working on their own fiduciary rules. That includes New Jersey, Nevada and Maryland.

Rostad, for one, said he hopes to see success in those states.

“Massachusetts is light years ahead of the SEC in what it means to be a fiduciary,” Rostad said.