Massachusetts Fiduciary Rule
The Massachusetts Securities Division (the “Division”) has adopted amendments to 950 MASS. CODE REGS. 12.200 (the “Regulations”) as they relate to the standard of conduct applicable to broker dealers and agents. The Division has prepared the following responses to questions about the Regulations and may update this page from time to time with responses to additional questions. The Adopting Release accompanying the adoption of the Regulations is available here.
Frequently Asked Questions
What broker-dealer activities or actions are subject to a fiduciary under the Regulations?
The Regulations make a broker-dealer or agent subject to a fiduciary duty to a customer when providing investment advice or recommending an investment strategy, the opening of or transferring of assets to any type of account, or the purchase, sale, or exchange of any security.
What is the effective date of the fiduciary conduct standard?
The adopted Regulations became effective on March 6, 2020 and enforcement of the Regulations will begin on September 1, 2020.
Which financial professionals and products are not covered under the Regulations?
The Regulations do not cover licensed insurance agents (unless selling or providing advice relative to securities) or insurance products (unless they relate to securities).
Do the Regulations cover the sale of fixed and variable annuities?
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.
Does the fiduciary conduct standard prohibit commissions?
No, the fiduciary conduct standard does not prohibit commissions. However, it requires that a broker-dealer or agent must make recommendations and provide investment advice without regard to the financial or any other interest of any party other than the customer. The fiduciary conduct standard also requires that the broker-dealer or agent must make all reasonably practicable efforts to avoid conflicts of interest, eliminate conflicts that cannot reasonably be avoided, and mitigate conflicts that cannot reasonably be avoided or eliminated.
Does the fiduciary conduct standard impose record keeping requirements on broker-dealers?
No. Consistent 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.
Does the new fiduciary conduct rule apply to investment advisers?
While the fiduciary conduct standard for broker-dealers and agents in the Regulations does not apply to investment advisers and investment adviser representatives, investment advisers and investment adviser representatives are separately held to a fiduciary conduct standard under Massachusetts and federal laws.
How does the fiduciary conduct standard apply to a firm that is registered in Massachusetts both as a broker-dealer and as an investment adviser?
The obligations of dually-registered firms depend on the functions and the activities of the firm. A firm making a recommendation or providing advice in its capacity as a broker-dealer would be subject to the broker-dealer conduct standard. When the same firm is acting as an investment adviser or a federally-covered adviser, it will be subject to the fiduciary duty that applies to investment advisers.
Are unsolicited trades subject to the fiduciary conduct standard?
The fiduciary conduct standard applies in connection with recommendations or advice provided by a broker-dealer. Activities of a broker-dealer in connection with unsolicited trades will be subject to applicable federal and state conduct rules
Are recommendations of government securities subject to the fiduciary conduct standard?
Recommendations of government securities are excluded from the fiduciary conduct standard. Activities of a broker-dealer or agent in connection with transactions in government securities will be subject to applicable federal and state conduct rules.
Can a broker-dealer or agent recommend high-cost, high fee products under the Regulations?
The Regulations require that a broker-dealer or agent must make recommendations and provide investment advice without regard to the financial or any other interest of any party other than the customer. The Regulations also require that the broker-dealer or agent must make all reasonably practicable efforts to avoid conflicts of interest, eliminate conflicts that cannot reasonably be avoided, and mitigate conflicts that cannot reasonably be avoided or eliminated. These requirements may make it difficult or impossible to recommend high-cost, high-fee products, particularly where lower cost or lower fee products are available.
Can a broker-dealer recommend that a customer open a 529 plan (educational savings plan) under the fiduciary conduct standard?
There is no restriction on recommendations of 529 plans under the fiduciary conduct standard, but the recommendation must meet the requirements of the Regulations.
Which financial professionals and products are not covered under the Regulations?
The Regulations do not cover licensed insurance agents (unless selling or providing advice relative to securities) or insurance products (unless they relate to securities).
When does an ongoing fiduciary duty exist under the Regulations?
An ongoing fiduciary duty is not imposed on a broker-dealer or agent beyond the time that a recommendation is made, unless the broker-dealer or agent has: (1) discretion in a customer's account (unless the discretion relates solely to the time and/or price for the execution of the order); (2) a contractual fiduciary duty; or (3) a contractual obligation to monitor a customer's account on a regular or periodic basis, as such regular or periodic basis is determined by agreement with the customer.
Under what other circumstances will a broker-dealer or agent owe an ongoing fiduciary duty to a customer?
Case law in Massachusetts and other jurisdictions has determined that under certain circumstances a broker-dealer has a fiduciary duty, including an ongoing fiduciary duty, to a customer. Courts have looked to the following non-exclusive factors in determining such a duty exists: (1) the degree of discretion the customer entrusted to the broker-dealer or agent; (2) whether the customer almost invariably followed the broker-dealer's or agent's advice; (3) whether the customer lacks investment experience; and (4) whether there are social or personal ties between the customer and the broker-dealer or agent. The Regulation is not intended to overrule or negate such case law.
Does the use of certain titles (e.g., financial consultant, wealth planner, portfolio manager) by a broker-dealer or agent create a presumption of an ongoing fiduciary duty?
The use of such titles by a broker-dealer or agent does not create a presumption of an ongoing fiduciary duty. However, use of such titles must not be used in a misleading manner.