Gov. Charles Baker of Massachusetts yesterday urged William Galvin, secretary of the commonwealth, to defer action on a proposed advice rule that would blanket broker-dealers, registered representatives and insurance agents operating in the state with a fiduciary standard.

Executives from brokerage and insurance trade groups turned out in force at a hearing on Tuesday to testify that Galvin’s proposal would harm their ability to operate in the state and serve investors.

Industry lobbyists have also been busy reaching out to the Massachusetts governor: “Based on feedback provided in public comments and directly to my administration, we are concerned the draft regulation may create confusion,” Baker said in his letter to Galvin.

Specifically, Baker wrote, he is concerned the current draft of the regulation could: 

  • “Reduce investment services and products that many of our citizens rely upon to properly save and invest for a variety of needs ranging from retirement to higher education”;
  • “Harm the business models of broker-dealers, which are legal, and who are significant employers in Massachusetts, and put such employers here at a competitive disadvantage with other states”;
  • “Disrupt the regulation of annuities and other insurance products [when] the Massachusetts Division of Insurance has already undertaken to ‘administer and enforce’ the insurance laws, including as they relate to annuities”; and
  • “Discourage broker-dealers from engaging in principal trading that benefits the municipal bond markets and thereby reduce liquidity and increase borrowing costs for a variety of agencies and municipalities.”

“Our administration supports sound regulation,” Baker added. “We commend the objective of the Securities Division to ensure strong investor protection oversight and to review its existing regulations for potential changes as services and products for investors have indeed evolved in recent decades.”

The draft regulation “does not appear to sufficiently account for differences in the industry, inadequately defines key terms and how regulated entities can resolve potential conflicts of interest and departs from federal regulations and regulations adopted in other states,” Baker said.

Twelve broker-dealer and insurance trade groups, including the Financial Services Institute (FSI), the Insured Retirement Institute (IRI) and SIFMA submitted a joint letter to Galvin on Tuesday explaining why he must defer to the SEC’s rule and not implement his fiduciary standard.

Specifically, Galvin’s proposal would “deem it an unethical or dishonest conduct or practice for a broker-dealer, agent, investment advisor or investment advisor representative required to be registered in Massachusetts to fail to act in accordance with a fiduciary duty to any customer or client.”

“We fear that the proposal will drive firms to significantly scale back their offerings in Massachusetts or potentially even discontinue operating in Massachusetts,” said Wayne Chopus, president and CEO of the Insured Retirement Institute, at the hearing on the proposal. IRI is a leading financial services trade association for the retirement income industry.

“A fiduciary standard is not some sort of panacea,” Chopus added. “The new [SEC] federal best interest standard is a substantial enhancement over current federal law and will adequately address Massachusetts regulators’ concerns about consumer protection. A person with bad intentions cannot be wrapped in a fiduciary tunic and somehow be transformed into a beacon of truth and honesty.”

Chopus urged Galvin to refrain from finalizing the proposal at this time and to instead “re-evaluate whether the proposal—or some variation thereof—is still necessary once [the SEC’s] Reg BI has been in effect long enough to assess its effectiveness.”