Massachusetts Secretary of the Commonwealth William F. Galvin finalized a controversial final regulation that imposes a fiduciary conduct standard on state-registered advisors and broker-dealers and broker reps doing business in the state—but only if they have discretionary authority over client accounts or agree to provide ongoing or regular account monitoring.

The change has consumer pundits concerned. “We are disappointed that Massachusetts has so significantly weakened its proposal,” said Barbara Roper, director of investor protection at the Consumer Federation of America. “While it is a modest improvement over [the Securities and Exchange Commission’s Regulation Best Interest], it does not adequately address major shortcomings in that standard. It is not a model that other states should follow.”

The Financial Services Institute (FSI), a trade group that lobbied vigorously against the rule, appears to have won some carve-outs from the fiduciary requirement, although Dale Brown, FSI’s president and CEO, told Financial Advisor that the institute is still reviewing the final rule. In effect, B-Ds and brokers are only subject to the fiduciary standard during the period when they provide “incidental advice,” exercise discretionary authority or do ongoing or periodic monitoring of client accounts.

But Massachusetts did make clear that a fiduciary duty “runs during the period in which incidental advice is made in connection with the recommendation of a security to the customer” and extends the duty beyond the recommendation period under certain circumstances.

The state said in its adopting release that it decided to revise the regulations to exclude “federally covered” investment advisors and advisor reps registered with the SEC after being persuaded by the Investment Adviser Association (IAA) and others that these professionals are already subject to a fiduciary standard at the federal level and that such state regulation would be redundant.

Galvin, however, asserted that enacting the rule will provide stronger protections for Massachusetts investors by imposing a heightened duty of care and loyalty on broker-dealers and their agents.

“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,” Galvin said.

“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,” he continued.

Any discretionary authority over the customer’s account means a broker “has assumed a position of trust and confidence” that would extend his or her fiduciary duty beyond the initial recommendation stage, according to the rule. A broker’s agreement to monitor a customer’s account on a regular or periodic basis would also trigger Massachusetts’ fiduciary standard.

FSI’s Brown said to Financial Advisor, "Throughout this process, we have urged the Massachusetts Securities Division to wait until after the implementation of the SEC's Regulation Best Interest (Reg BI) in the coming months. Our members are diligently working toward compliance with Reg BI, and we are confident it will greatly enhance investor protection."

"We are thoroughly reviewing the rule and hope that the Securities Division has made revisions to address the concerns we previously expressed through our comments and testimony,” Brown said. “However, the speed with which the Securities Division moved this proposal to a final rule is deeply concerning, particularly given the significant number of comments submitted which merited careful consideration.”

Among the provisions included in the new regulations is a prohibition on all sales contests, which Galvin’s office has identified as a repeated cause of harm to investors.