Claiming the SEC failed to protect investors with its new conduct rules for brokers and advisors, Massachusetts regulators are proposing what they say are tougher rules for practitioners in their state.
The proposal would create a fiduciary standard for broker-dealers, agents, investment advisors and investment advisor representatives registered in the state.
“We are proposing this standard because the SEC has failed to provide investors with the protections they need against conflicts of interest in the financial industry with its recent ‘Regulation Best Interest’ rule,” Secretary of State William Galvin said in a prepared statement.
“My office has seen firsthand the serious financial harm that investors and savers have suffered as a result of conflicted financial advice,” he added. “Investors must come first.”
The proposal “requires that financial recommendations and advice must be in the best interest of customers and clients, without regard to the interests of the broker-dealer, advisory firm and its personnel. The conduct standard is based on the common law fiduciary duties of care and loyalty.”
The SEC's Reg BI, which was approved by the commission earlier this month, “fails to define the key term ‘best interest,’ and sets ambiguous requirements for how longstanding conflicts in the securities industry must be addressed under the new rule,” Galvin said.
The SEC rules also fails to indicate whether some of “the most problematic practices” in the securities industry are prohibited, Galvin said. While the agency indicated that sales contests limited to specific products or product types would be contrary to that rule, it did not indicate that broader-based sales contests or quotas would be contrary to its requirements, he said.
“In many instances, it appears that the mitigation of conflicts required under the SEC Regulation Best Interest can be accomplished through disclosure," he said.
Disclosure alone “cannot replace a clear fiduciary standard of conduct, which is the basis for the division's proposal,” Galvin said.
Unlike investment advisors, who are required to put their client's interest first, brokers are only required to ensure that the investment products they use are suitable for clients. But Galvin argued the suitability standard doesn't go far enough to protect investors.