On August 25, 2023, the Massachusetts Supreme Judicial Court (SJC) reinstated the Commonwealth’s Uniform Fiduciary Duty Rule applicable to broker-dealers doing business in Massachusetts (whether or not they are located in Massachusetts). Originally adopted by Secretary of the Commonwealth William Galvin in March 2020, the rule was vacated in a March 2022 Superior Court decision after a challenge from online trading platform Robinhood Financial. The SJC’s decision in Robinhood Financial LLC v. William F. Galvin, et al. reverses the trial court’s holding that the rule exceeded the Secretary’s authority and finds the rule did not conflict impermissibly with the SEC’s Regulation Best Interest—a 2019 regulation imposing a higher standard of conduct than the traditional “suitability” standard for broker-dealers making recommendations to retail customers.
The Massachusetts rule requires broker-dealers providing investment advice to abide by the “fiduciary” standard of care governing registered investment advisers. Under the Massachusetts Uniform Securities Act, it is now an “unethical or dishonest practice” to “fail to act in accordance with a fiduciary duty to a customer” when providing a range of investment-related advice and services. Broker-dealers are now required to adhere “to duties of utmost care and loyalty to the customer” in activities including:
- Providing investment advice
- Recommending an investment strategy
- The opening or transfer of assets to any account, including retirement account rollovers
- The purchase, sale, or exchange of any security
“Only the Best”
The “duty of care” requires a “broker-dealer or agent to use the care, skill, prudence, and diligence that a person acting in a like capacity” would use under the facts and circumstances. In practice, the rule requires that broker-dealers only recommend the “best” of the reasonably available options for each specific customer, based on their individual circumstances, when recommending any securities transactions, investment strategies, retirement account rollovers, or opening any new accounts.
Enhanced Disclosure
Intended to address long-standing concerns over steering clients towards pricier, riskier financial products because they pay higher fees to broker-dealers, the “duty of loyalty” requires that broker-dealers providing advice must also:
- Disclose all material conflicts of interest
- Make all “reasonably practicable efforts” to avoid conflicts of interest
- Eliminate conflicts of interest that cannot be “reasonably avoided or eliminated”
- Make these recommendations without regard to the financial or any other interest of anybody except the customer
These conflicts of interest would generally include any financial or non-financial incentives, whether received by the broker-dealer or their registered agents. This includes rebates and fees, and may implicate certain payment-for-order flow arrangements.
Looking Forward
The court’s holding that the rule is permitted under the Massachusetts Uniform Securities Act and is not preempted by federal law may tempt more jurisdictions to act. Firms should examine their existing policies and procedures to ensure compliance with the SEC’s Regulation Best Interest and consider updating them to address these elevated requirements.
Barclay Damon will continue to monitor for further developments.
If you have any questions regarding the content of this alert, please contact Benjamin Zakarin, associate, at bzakarin@barclaydamon.com; Joe Stanganelli, Commercial Litigation Practice Area co-chair, at jstanganelli@barclaydamon.com; Brian Whiteley, Commercial Litigation Practice Group leader, at bwhiteley@barclaydamon.com; or another member of the firm’s Commercial Litigation Practice Area.