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.
Broker-Dealer Fiduciary Standard
The Division has issued a final regulation defining a fiduciary standard of conduct for broker-dealers and agents registered in or required to be registered in Massachusetts. The regulation went into effect in March 2020. The final regulation makes a number of changes in the proposal issued last December:
- As proposed, the regulation would have applied to investment advisers and their representatives and to advice on commodities and insurance products. Both of these requirements have been eliminated because, the Division stated, investment advisers “are already subject to a fiduciary duty” and the regulation should only apply to “securities.”
- The final regulation continues to provide that failure to adhere to the “fiduciary standard of utmost care and loyalty” will be deemed a dishonest or unethical practice.
- The duty applies during the period in which advice is given in connection with a securities recommendation. It is also extended to periods where the broker-dealer exercises discretion over a customer’s account, has a contractual fiduciary duty or a contractual obligation to monitor a customer’s account.
- The regulation requires a broker-dealer to “Use the care, skill, prudence, and diligence that a person acting in a like capacity and familiar with such matters would use, taking into consideration all of the relevant facts and circumstances.” This duty includes the requirement to:
- Make a reasonable inquiry regarding risks, costs, and conflicts of interest related to the recommendation, the customer’s investment objectives, risk tolerance, financial situation and needs and “any other relevant information.”
- The duty of loyalty requires a broker-dealer to disclose all material conflicts of interest. In its release, the Division makes it clear that the “duty of loyalty cannot be satisfied without disclosure…”.though the regulation itself states that “disclosing conflicts alone does not meet or demonstrate the duty of loyalty.” Note: sales contests create a presumption of a violation of this duty.
- The regulation goes on to require that broker-dealers make all “reasonably practicable efforts” to avoid conflicts and eliminate or mitigate those that cannot “reasonably be avoided or eliminated.” It also specifies that recommendations made in connection with sales contests are “presumed to constitute a breach of the duty of loyalty” though quote requirements and special inventive programs are no longer prohibited per se.
- The final regulation continues to exclude from the definition of “customer” various financial institutions and institutional buyers (in general, accredited investors under the securities laws and 501(c)(3) organizations with a securities portfolio of more than $25 million), as well as fiduciaries under ERISA.
- Enforcement of the regulation began on September 1, 2020.