The Massachusetts Securities Division has released responses to fifteen questions concerning the fiduciary conduct regulation for broker-dealers and their agents it issued in February. 950 Code of Massachusetts Regulations § 12.207. While some of the responses essentially repeat what is in the regulation or the accompanying Adopting Release, some are notable for the clarification, or lack thereof, they provide.
Insurance Products. For example, Questions 3 and 13 (they are identical, as are the responses) ask, “Which financial professionals and products are not covered under the Regulations?” The response: “The Regulations do not cover licensed insurance agents (unless selling or providing advice relative to securities) or insurance products (unless they relate to securities).” The latter ambiguous parenthetical qualification seems at odds with the Adopting Release (at page 2) which notes that comments on the proposed regulation pointed out that the definition of “security” in the Massachusetts Uniform Securities Act (Mass. Gen. Laws ch. 110A, § 401(k)) explicitly excludes “any insurance or endowment policy or annuity contract under which an insurance company promises to pay money either in a lump sum or periodically for life or for some other specified period.” In deference to those comments, the Adopting Release states, “the Division has removed the express language regarding advice on . . . insurance products from the Final Regulations.”
Variable Annuities. The FAQ’s also seem to backtrack from what was reported as the Division’s clarification that the regulation does not apply to variable annuities. See Question 4: “Do the Regulations cover the sale of fixed and variable annuities?” The response: “If the investment meets the definition of security, then it would be covered by the Regulations. If a fixed or variable annuity transaction involves a recommendation relating to an investment strategy, opening or transferring an account, or the purchase, sale or exchange of a security, it would also be covered.” The Securities Division has in the past brought administrative enforcement actions concerning sales of fixed annuities and variable annuities. In February 2020 the National Association of Insurance Commissioners approved revisions to the Suitability in Annuity Transactions Model Regulation that clarify that all recommendations by agents and insurers must be in the best interest of the consumer. That revised model regulation has not yet been adopted by the Massachusetts Division of Insurance.
Investment Advisers. The response to Questions 3 and 13 omits to mention other “financial professionals . . . not covered under the Regulations”: investment advisers and investment adviser representatives, as the response to Question 7 makes clear.
Government Securities. The FAQ’s also seem to diverge from the regulation and the Adopting Release in the response to Question 10: “Recommendations of government securities are excluded from the fiduciary conduct standard.” Compare regulation subsection 12.207(2)(e): “Notwithstanding the foregoing, investment advice or a recommendation regarding the purchase, sale, or exchange of any security in M.G.L. c. 110A, § 402(a)(1) [“any security . . . issued or guaranteed by the United States, any state . . . , any political subdivision of a state, or any agency or corporate or other instrumentality of 1 or more of the foregoing”] to or for a customer shall be excluded from the scope of 950 CMR 12.207(2)(b),” which sets forth the duty of loyalty component of the fiduciary conduct rule, but, pursuant to the negative-implication canon of textual interpretation (expressio unius est exclusio alterius), not from the scope of the duty of care component set forth in subsection 12.207(2)(a). See also the Adopting Release at page 8: “recommendations and advice provided in connection with [municipal and other government] securities continue to be subject [to] the duty of care under Section 12.207(2)(a) of the Final Regulations.”
Unsolicited Trades. The answer to Question 9—“[a]re unsolicited trades subject to the fiduciary conduct standard?”—seems to be “no”: “The fiduciary conduct standard applies in connection with recommendations or advice provided by a broker-dealer.” See subsection 12.207(1)(a): when such recommendations or advice concerns “an investment strategy, the opening or transferring of assets to any type of account, or the purchase, sale, or exchange of any security.”
Common Law Fiduciary Duty. The response to Question 15 confirms “[t]he Regulation is not intended to overrule or negate . . . case law” setting forth circumstances under which “a broker-dealer has a fiduciary duty, including an ongoing fiduciary duty, to a customer.”
Record Keeping and Reporting. Perhaps as part of a continuing attempt on the Division’s part to steer clear of preemption arguments based on the National Securities Markets Improvement Act of 1996, the response to Question 6 reiterates what the regulation states in subsection 12.207(5), that is, that “[c]onsistent with Section 15(i)(1) of the Securities Exchange Act, the fiduciary conduct standard does not impose requirements for record keeping or financial or operational reporting requirements.”
Reg BI. The Securities Division will commence enforcement of its fiduciary conduct regulation on September 1. Meanwhile, the SEC’s Regulation Best Interest (Exchange Act Rule 15l-1; “Reg BI”) is still scheduled to take effect on June 30. The Second Circuit Court of Appeals has scheduled expedited oral argument for June 2 in the cases brought by seven states (not including Massachusetts) and two private parties challenging Reg BI as insufficiently protective of investors and inconsistent with the Dodd-Frank Act.
