Raising the Bar: Massachusetts Fiduciary Rule Brings Higher Standards and Criticism from Both Sides

By: Eric Fairchild, Senior Principal

In late February, Massachusetts made its final fiduciary ruling—the first in the nation—that brokers must act in their clients’ best interest—and not their own. This new rule means that brokers in Massachusetts must raise their standards when it comes to investment advice. For many insurers, this means providing additional oversight and guidance to advisors to ensure compliance with this ruling, adding additional checks to an already complicated state regulatory environment. Automation is critical to ensure nothing falls through this process.

This was described by Massachusetts as a win for consumers; however, the Consumer Federation of America believes it is a “weakened” version of what was initially intended. They consider it too weak a model for other states to follow, with provisions like those related to “ongoing monitoring and compensation” being removed after the comment periods.

Initial fears about the rule’s applicability to variable annuities, which to many are considered securities, were allayed. A few days after the initial ruling, a spokesperson for the Massachusetts Secretary of Commonwealth William Galvin said that variable annuities are exempt from this rule as they are considered securities at a Federal level, but not in Massachusetts.

From the industry perspective, opposition was expected, and it has remained now that the final rules have been published. Financial services firms and insurers criticized the rule, saying that by raising the broker standard of conduct, the rule will create a difficult and expensive regulation in which they must comply. There is an expectation of litigation relative to pre-emption and on other grounds.

NEOS believes there are several implications to the way this rule (the first of many expected) has played out:

1. The likelihood of many other states adopting similar rules is high, but with criticism from both consumer groups and the industry, the timing and content of future rules are far from certain.

2. In some respects, this rule goes beyond the SEC’s Regulation Best Interest, though not as far as consumer advocacy groups would like it to go. The expectation is that some states will push their requirements even more aggressively in favor of the consumer.

3. Many in the industry are not well-positioned to deal with an onslaught of widely ranging state-based rulings and requirements, all with varying adoption periods and reporting requirements.

The “false alarm” associated with the DOL Fiduciary Rule (proposed in 2015, delayed multiple times, and eventually vacated in 2018 by the Fifth Circuit Court of Appeals) galvanized many in the industry to prepare for changes in this space. But unless that preparation included the ability for business process and technology to adapt to a wide range of state-based rules and regulations, there is more work to do. We do not expect many state-based rulings will turn out to be false alarms, action will be required sooner rather than later.

So, what is the call to action for Insurers? They must be ready to provide additional oversight and guidance to advisors based on an unknowable set of state-based requirements in the next one to three years. Processes and technology must be rules-based and automated in order to create the flexibility needed to survive, and win, in the coming years.

If your business needs to set a strategy for the Massachusetts fiduciary ruling, or needs to prepare for what will follow, contact a NEOS expert today. With two decades helping insurers with their business strategy needs, NEOS is well equipped to set you on the right path.

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