On Friday, 21 February 2020, the Massachusetts Securities Division (the MSD or the Division) released final regulations governing the standard of conduct applicable to broker-dealers and their agents (Final Regulations).1  The Final Regulations apply a fiduciary duty standard of conduct to broker-dealers and agents2 and will be effective upon publication in the next Massachusetts Register, which is scheduled for 6 March 2020. The Final Regulations will be enforced as of 1 September 2020. As the financial services industry continues to grapple with the implementation of Regulation Best Interest (Reg. BI) at the federal level, these Final Regulations (and similar state proposals being considered in Nevada and New Jersey) create more complexity and raise time-sensitive compliance questions for broker-dealers and dual registrants.


As we previously noted, Massachusetts has been moving forward with a state-based solution for what it saw as deficiencies in Reg. BI. When proposing these regulations on 29 November 2019 (the Proposed Regulations), Secretary of the Commonwealth Galvin stated that he was “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 ‘Regulation Best Interest’ rule.” The Final Regulations, while a departure from Reg. BI, have undergone significant revisions compared to the Proposed Regulations. The revisions reduced, but did not eliminate, areas of conflict with Reg. BI.

The Final Regulations are the result of a fairly accelerated rulemaking. After collecting industry feedback through a pre-proposal in the summer of 2019, the Division released its Proposed Regulations on 29 November 2019. A public hearing on the Proposed Regulations was held on 7 January 2020, with the public comment period ending on the same day. The Division made a number of changes to the Proposed Regulations based on the feedback it received, apparent in both the Final Regulations and the accompanying Adopting Release.3  As a result, multiple issues identified by commenters and industry associations have been addressed and improved. Nevertheless, the Final Regulations potentially remain vulnerable to a federal preemption challenge as they do not fully align with Reg. BI.

Comparing the Proposed Regulations (2019) to the Final Regulations (2020): Summary of Changes
We previously noted the Proposed Regulations introduced significant regulatory changes that would require major operational challenges for broker-dealers, agents, investment advisers, and investment adviser representatives. The Final Regulations have adjusted and in some cases decreased these challenges. We summarize key differences between the Proposed and Final Regulations below, with comparisons to Reg BI. We also include for your reference a marked comparison reflecting the changes between the Proposed and Final Regulations.

  • Uniform Standard of Care Concept Removed: The fiduciary standard of conduct in the Final Regulations covers only broker-dealers and agents, wholly removing investment advisers (even state registered investment advisers) and investment adviser representatives. This is a significant concession by the MSD, which addresses concerns that the MSD would attempt to regulate federally covered advisers indirectly through the actions of supervised persons that are registered solely as investment adviser representatives in Massachusetts
    • Comparison to Reg. BI: Reg. BI does not endorse a uniform standard of care approach and solely applies to broker-dealers and their associated persons. The Final Regulations also now solely apply to broker-dealers and their agents.

  • Clarification of Episodic and Ongoing Fiduciary Obligations: The Adopting Release clarifies that the fiduciary duty that applies to broker-dealers is episodic, meaning that it “runs during the period in which the incidental advice is made in connection with the recommendation of a security to the customer” and only becomes ongoing in the event of certain additional triggers.
    • Comparison to Reg BI: Much like Reg BI, the Final Regulations allow for an episodic duty, which is better aligned with the episodic nature of broker-dealers providing advice.

  • Triggers of Ongoing Fiduciary Duty Narrowed: The circumstances that create an ongoing fiduciary duty have been narrowed. The ongoing duty now applies if a broker-dealer or agent has or exercises discretion in a customer’s account, through contractual fiduciary duty, or contractual obligations to monitor a customer’s account, on a regular or periodic basis. Other subjective thresholds for application of ongoing fiduciary duty (such as the receipt of ongoing compensation or engaging in behavior that results in a reasonable expectations of regular or periodic monitoring) that were part of the Proposed Regulations are not part of the Final Regulations.
    • Comparison to Reg BI: While not identical to Reg BI, the Final Regulations take a similar approach to account monitoring in that it has to be a contractually agreed-upon service to become part of the scope of what the Final Regulations cover.

  • Use of Certain Titles No Longer Triggers a Presumption of Fiduciary Duty: The use of titles (e.g., financial advisor and financial consultant) will no longer trigger a presumption of fiduciary duty, as contemplated in the Proposed Regulations under which the use of certain titles created a reasonable expectation of ongoing monitoring. Although the Adopting Release notes that the Division has removed the titling provision in reliance on “the protections provided under the Final Regulations," the MSD did take the opportunity to express its view that use of advisory titles implies that broker-dealers are providing more than incidental advice and continues to create customer confusion.
    • Comparison to Reg BI: Reg BI focuses on titles as part of the capacity disclosure within the disclosure obligations of the rule as well as Form CRS disclosures. In contrast, the Final Regulations are silent on titles - although the Adopting Release strongly telegraphs that titles may be an area of focus for the Division in the context of exams and enforcement activity.

  • Broader Compensation Practices Could be Allowed Pursuant to the Final Regulations: The Final Regulations remove references to implied or express quota requirements and other special incentive programs that previously would have resulted in an automatic breach of the duty of loyalty. The use of sales contests, however, will be a de facto breach of the fiduciary duty, though sales contest remains an undefined term and the Division expressed concern about sales practice abuses involving both product and non-product specific sales contests.
    • Comparison to Reg BI: As part of the conflict of interest obligation in Reg BI, broker-dealers must establish policies and procedures to identify and eliminate sales contests, sales quotas, bonuses and non-cash compensation based on the sales of specific securities or specific types of securities within a limited period of time. In contrast, the Final Regulations take a far more open-ended approach to sales contests. The Final Regulations remove references to quotas and special incentive programs from the text of the Final Regulations. However, the Final Regulations refer to sales contests broadly and do not further define or limit the concept to the sale of specific securities or types of securities within a limited period of time. Rather, the Adopting Release notes continued concerns about sales practices involving both product and non-product sales contests.

  • Commodities and Insurance Products No Longer Expressly Included: The Final Regulations no longer list commodities or insurance products. We note that the Adopting Release states “the Division has removed the express language regarding advice on commodities and insurance products.” (Emphasis added.) This leaves open the question of whether the MSD will continue to take the point of view that advice regarding securities resulting in a purchase of commodity or insurance products would be under its jurisdiction.
    • Comparison to Reg BI: The removal of commodities and insurance products aligns the Final Regulations more closely to Reg BI.

  • Duty of Care Provision Remains Largely Unchanged While Duty of Loyalty Provision Focuses Further on Reasonableness Standard: The Final Regulations add a “reasonableness” standard for eliminating and mitigating conflicts. The Adopting Release also recognizes that broker-dealers and their agents are entitled to get paid for their services (including selling proprietary products), though the text of the Final Regulations could imply otherwise. Specifically, we note that the “without regard to the financial or any other interest of any party other than the customer” language remains part of the duty of loyalty, which has been an ongoing area of debate in both the Reg. BI rulemaking and this rulemaking. The “without regard to” language originated in the Dodd-Frank Act but the SEC ultimately used the alternative “without placing the financial or other interest” language in Reg. BI. Finally, the duty of loyalty conflicts provision (which address avoiding, mitigating, eliminating and disclosing conflicts) and the related discussion in the Adopting Release will require further clarifications.
    • Comparison to Reg BI: The fact that the Final Regulations preserve the “without regard to” language is a significant departure from the Reg. BI approach to conflicts of interest, especially as the SEC did not use “without regard to” in Reg. BI for fear that it would be inappropriately construed to require conflicts elimination, which the SEC believes could ultimately harm retail investors by reducing their access to different types of services and products.

  • Duty of Loyalty Provision Will not Apply to Certain Government Securities: The Final Regulations partially removed government securities through a newly added exclusion from the duty of loyalty provision. Therefore, principal transactions in government securities would be excluded from the Final Regulations’ duty of loyalty, but not the duty of care.
    • Comparison to Reg BI: Reg BI did not address this area explicitly. This addition to the Final Regulations is in response to state-specific political and economic dynamics leading up to the adoption of the Final Regulations.


The adopted regulations will be effective upon publication in the Massachusetts Register on 6 March 2020, but will not be enforced until 1 September 2020.

Our Take & Looking Ahead

Overall, while industry comments were considered and incorporated into the Final Regulations, the existence of the Final Regulations continues to represent a multi-part risk for broker-dealers and their agents. The MSD has historically taken an aggressive enforcement posture, and the many undefined terms in the Final Regulations could be leveraged in an enforcement context to pursue activities that would otherwise comply with Reg. BI. We also have noted above that there are differences between Reg BI and the Final Regulations, which also may contribute to differing enforcement outcomes. Furthermore, while the Final Regulations are more closely aligned to Reg. BI, any state fiduciary rule differing from Reg. BI raises long-term regulatory risk of additional states engaging in such rulemaking. Additional state rulemaking, in turn, raises regulatory uncertainty for firms, particularly if additional fragmentation in standards of care regulation occurs.

1See Final Regulations at https://www.sec.state.ma.us/sct/sctfiduciaryconductstandard/fiduciaryrule-adoption.htm (last retrieved 23 February 2020).

2The Massachusetts Uniform Securities Statute defines an agent as follows: “'Agent' means any individual other than a broker-dealer who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities.” Mass. Gen. Laws ch. 110A § 401(b). There are certain exemptions available to the definition of agent, but the majority of retail-facing registered representatives of a broker-dealer doing business in Massachusetts must register as agents with the Division. See Mass. Gen. Laws ch. 110A § 201.

3See Adopting Release at https://www.sec.state.ma.us/sct/sctfiduciaryconductstandard/fiduciaryrule-adoption.htm (last retrieved 23cFebruary 2020).

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