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Massachusetts Securities Division Begins Enforcement Of New State Fiduciary Conduct Standard

On September 1, 2020, the Massachusetts Securities Division (“MSD”) began enforcing a new state regulation that holds all broker-dealers and their agents to a fiduciary conduct standard requiring them to “make recommendations and provide investment advice without regard to the financial or any other interest of any party other than the customer”.  Massachusetts becomes the first state to implement its own fiduciary standard in light of the implementation of Regulation Best Interest (“Reg. BI”) by the SEC on June 30, 2020.  The commencement of active MSD enforcement oversight shines a spotlight on compliance personnel as they ascertain how to best supervise broker-dealers and  agents registered in MA under this new standard. (Significantly, even  out of state firms and registered representatives are charged with adhering to the new regulation if they are dealing with Massachusetts residents.) 

The MSD has long been in favor of a stronger fiduciary standard applying to all broker-dealers, investment advisors and their agents when servicing  Massachusetts clients, regardless of their status or title.  The MSD previously made this clear in its letter to the SEC in August 2018, opining that the then proposed Reg. BI did not go far enough to protect Main Street investors.  The biggest concern for the MSD has always been the potential  conflict of interest that may arise when a registered representative makes any recommendation to a client to purchase or sell a security. 

It now remains to be seen how aggressive the MSD will be in the enforcement of this new fiduciary standard.  The initial regulations proposed by the MSD were to apply to broker-dealers and investment advisors (and their agents), and also included references that the proposed regulations were applicable to commodities and insurance products as well.  However, in the comment process, the proposed regulations were amended.  For example, the issue was raised that  annuities and insurance products are excluded from the definition of “security,” as defined in M.G.L. c. 110A, § 401(k).  Therefore, the proposed changes by the MSD should be limited only to securities. In response, the MSD removed the express language covering advice related to commodities and insurance products from the final version of the new fiduciary conduct  standard.  In addition, the MSD amended the final version to apply to broker-dealers and their agents, and not to investment advisors.  The amended final fiduciary conduct standard can be found here

Regardless of the changes to the final rule, given our past experiences with the MSD,  we expect that the Staff will be aggressive in the enforcement of the new fiduciary conduct standard in order to define the limits of  both permissible conduct and products going forward.  Indeed, if past actions by the Staff in connection with the rollout of new securities regulations are any guide, we would expect to see the MSD soon send subpoenas to a wide sweep of investment firms doing business in the Commonwealth,  seeking documents related to compliance with the new fiduciary conduct standard.  We would also expect to see MSD Enforcement file actions shortly thereafter.

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©1994-2021 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.National Law Review, Volume X, Number 246
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Pete S. Michaels MIntz Member Securities Litigation White Collar Defense & Government Investigations Arbitration, Mediation,
Member

Pete focuses his practice on securities litigation, regulatory proceedings involving financial service companies and products, and compliance matters. He represents multinational and regional financial services firms, including banks, broker-dealers, investment advisers, mutual fund firms, and insurance companies as well as their employees, directors, and officers.

Pete’s extensive experience with securities disputes includes class actions, state and federal court cases, arbitration, and related employment matters. He also represents clients before a wide range of federal, state and...

617-348-4861
David L. Ward Member Securities Litigation White Collar Defense & Government Investigations Complex Commercial Litigation Arbitration, Mediation, ADR
Member

David Ward focuses his practice on financial services regulatory matters, internal investigations and related litigation. He represents financial services clients throughout the United States, including broker-dealers, investment advisors, banks, pension consultants, insurance companies and publicly traded entities before the SEC, FINRA, CFTC, U.S. Department of Justice and state regulators. David regularly assists clients in internal investigations; the defense of regulatory investigations, sales practice issues, corporate governance matters and securities-related litigation in state and...

617-348-4860
Michael E. Pastore Of Counsel Mintz Class Action Securities Litigation White Collar Defense & Government Investigations Arbitration, Mediation, ADR
Of Counsel

Michael focuses his practice on representing 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. He represents publicly traded companies in a variety of industries, including retail and manufacturing, as well as Internet start-ups.

Michael’s extensive experience with consumer protection laws includes the Fair Credit Reporting Act (FCRA), Fair Debt Collection Practices Act (FDCPA), Truth in Lending Act (TILA...

617-239-8427
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