Fiduciary/Best Interest Development
Advisor Fee Table
- The Massachusetts Securities Division (“Division”) has adopted a rule requiring investment advisers registered with the Division to create a stand-alone Table of Fees for Services. The Division has provided instructions for creation of the form and a template for development of the Table.
- Specifically, an investment adviser must create a one-page fee table, which includes all fees and services provided by the adviser. The Division notes that the “Fee Table supplements, but does not replace” an adviser’s disclosure obligations.
- The fee table must be updated annually in coordination with the timing of required amendments to the adviser’s Form ADV, and must be delivered annually in paper or electronic form to the investment adviser’s current advisory clients.
- The requirement will be enforced by the Division beginning January 1, 2020.
Adoption of Amendments to Investment Adviser Disclosure Regulations
Broker-Dealer Fiduciary Standard
- On March 30, 2022, in Robinhood Financial, LLC v. Galvin, a Massachusetts Superior Court Judge declared that the Massachusetts fiduciary duty rule (the “Rule”) is unlawful.
- The Rule, which went into effect on March 6, 2020, and became enforceable on September 1, 2020, imposes a fiduciary conduct standard on broker-dealers and their agents and provides that a failure to adhere to that standard is deemed a dishonest or unethical practice subject to sanctions by the Secretary of the Commonwealth of Massachusetts (the “Secretary”).
- Robinhood Financial challenged the validity of the Rule following an administrative enforcement action brought by the Secretary alleging that it had breached its fiduciary duty under the Rule. Robinhood argued that the Rule is invalid on its face, the Secretary lacked authority to adopt it, and that it is preempted by the SEC’s Regulation Best Interest (“Reg BI”).
- The court determined that adoption of the Rule was beyond the Secretary’s authority and, therefore, the Rule is invalid. As a result, the court did not need to address the preemption issue.
- In reaching its conclusion, the court found that the Rule overrides common law as defined by the Supreme Judicial Court of Massachusetts in a 2001 decision (Patsos v. First Albany Corp.) by enlarging the universe of broker-dealers subject to fiduciary obligations beyond those subject to such duties under that decision. Under the Patsos decision, the determination of whether a broker-dealer is subject to a fiduciary obligation depends on the level of discretion exercised by the broker-dealer on behalf of the customer. In contrast, the fiduciary standard under the Rule applies whenever a broker-dealer makes a recommendation or provides investment advice to a customer. Accordingly, broker-dealers who are not subject to fiduciary obligations under common law as defined by the Patsos court could be subject to those obligations under the Rule.
- The court also pointed out that the Massachusetts Uniform Securities Act directs that Massachusetts law be coordinated with federal and state law elsewhere. The court reasoned that because the Rule creates conflicts with Reg BI and possibly other state laws – as acknowledged by the Secretary – this is further evidence that the Secretary acted outside his delegated authority and, therefore, the Rule is void as contrary to that Act.
- The Secretary had an opportunity to appeal the decision during the 30-day period following issuance of the court order but did not.
Suitability in Annuity Transaction
- The Massachusetts Division of Insurance (the “Division”) has finalized a rule that sets forth a best interest standard for producers in recommending an annuity to consumers and requires insurers to establish and maintain a system to supervise recommendations so that the insurance needs and financial objectives of the consumer are effectively addressed. The rule is based on the NAIC model (discussed below).
- The regulation applies to sales or recommendations of an annuity made on or after June 1, 2023.
- Under the rule, when recommending an annuity, the producer must exercise reasonable diligence, care, and skill in knowing the consumer’s financial situation, insurance needs, and financial objectives. The producer must also understand the available recommended options after making a reasonable inquiry into the options available to the producer and have a “reasonable basis to believe the recommended option effectively addresses the consumer’s financial situation, insurance needs, and financial objectives over the life of the product, as evaluated in light of the consumer profile information.”
- Prior to recommending an annuity, the producer must prominently disclose the scope and terms of the relationship with the consumer, the role of the producer in the transaction, and the sources and types of cash compensation and non-cash compensation to be received by the producer and must notify the consumer of the right to receive additional information. The Division’s website includes a Form that can be used for this purpose.
- The producer must “identify and avoid or reasonably manage and disclose material conflicts of interest, including material conflicts of interest related to an ownership interest” and make a written record of any recommendation and the basis for the recommendation.
- The regulation does not apply to recommendations involving contracts used to fund certain retirement plans, including an ERISA plan, a tax-qualified retirement plan, governmental plans, church plans and nonqualified deferred compensation arrangements.
- The regulation does not create a fiduciary obligation or relationship with the consumer nor does it create a private cause of action for enforcing these new standards.
211 CMR 96.00: Suitability in annuity transactions