In a ruling issued on August 25, 2023, the Supreme Judicial Court of Massachusetts, also known as the Massachusetts Supreme Court, reinstated the Massachusetts fiduciary duty rule. This rule elevates the fiduciary standard for broker-dealers and their agents in Massachusetts to a level consistent with that of investment advisers.
Background:
The Massachusetts fiduciary duty rule was initially proposed by the Massachusetts Securities Division on December 3, 2019, and it became effective on March 6, 2020. In December 2020, the Massachusetts Secretary of State initiated an administrative proceeding against an internet-based broker-dealer registered with the SEC, alleging violations of the fiduciary duties of care and loyalty under the rule. The broker-dealer subsequently challenged the validity of the rule in the Superior Court Department of Massachusetts, resulting in the rule’s invalidation on March 30, 2022.
Massachusetts Supreme Court Analysis:
On appeal from the Secretary, the Massachusetts Supreme Court conducted a thorough analysis and overturned the Massachusetts Superior Court’s decision, reinstating the fiduciary duty rule. The key issues addressed in the analysis included:
- Federal Preemption: The Massachusetts Supreme Court determined that the rule was not preempted by federal law. The broker-dealer argued that Regulation Best Interest (Reg BI), the federal standard for broker-dealers’ fiduciary obligations, set a cap on these obligations and preempted the state rule. The court disagreed, noting that Reg BI establishes a regulatory floor, allowing states to provide additional protection through their regulations.
- Secretary’s Authority under Massachusetts Uniform Security Act (MUSA): The court affirmed the Secretary’s authority to promulgate the rule under MUSA. It found that the Secretary had considerable leeway in interpreting statutes, and the rule’s promulgation fell within the Secretary’s authority.
- Abrogation of Common Law: The Massachusetts Supreme Court determined that the rule did not abrogate Massachusetts common law. While it offered separate protections, the rule stood alongside common law rather than replacing it.
- Nondelegation Doctrine: The court found that MUSA appropriately delegated authority to the Secretary for promulgating the rule, following a three-step analysis to determine the lawfulness of the delegation.
Conclusion:
The Massachusetts Supreme Court’s ruling reinstates the Massachusetts fiduciary duty rule for broker-dealers. As a result, broker-dealers operating in Massachusetts must adhere to the rule’s requirements, aligning their fiduciary standards with those of investment advisers. This decision has significant implications for broker-dealer operations and legal responsibilities in the state.
