The showdown between Bill Galvin and Boston’s business community isn’t over yet. In fact, it’s just getting started.
The secretary of the Commonwealth received a flood of criticism in late July from major local business groups and a few familiar financial titans about his new regulations intended to protect individual investors who work with broker-dealers.
Now, we’re on to Round 2. On Tuesday, the Greater Boston Chamber of Commerce plans to e-mail a memo to thousands of chamber members and others who subscribe to its policy briefs that is aimed at building public opposition to Galvin’s regulations.
Essentially, the chamber says imposing a so-called fiduciary standard on broker-dealers would increase costs for everyday consumers, making it harder for new investors to even start saving. The rule would require broker-dealers to recommend only “the best” options for investors, something the chamber calls a potentially impossible standard to meet. It would also require brokers to provide the same ongoing advice to investors that investment advisers provide, a move that the chamber says would translate into increased fees. Advice that was previously free, the chamber argues, would now be unattainable without a fee.
Welcome to the financial world, post-“Reg BI.” That’s shorthand for Regulation Best Interest, a federal standard that the Securities and Exchange Commission voted in early June to impose. While it increases disclosure requirements, critics say the new rule still falls short. It certainly doesn’t go as far as an Obama-era regulation that imposed the fiduciary standard on broker-dealers but was later struck down in a federal Appeals Court.
Less than two weeks after the SEC vote, Galvin offered up his own state plan to extend the fiduciary standard to brokers. (New Jersey regulators had begun a similar process, and experienced a similar backlash.) Galvin argues that the SEC rule fails to eliminate the conflicts of interest that run rampant within the industry. Individual investors, he says, have suffered under a lower standard that has required brokers to only recommend investments that are “suitable” for their clients. Brokers are often paid by commission, and thus have an incentive to promote certain investment options; the new SEC rule requires them to disclose, and possibly mitigate, these conflicts.
Chamber chief executive Jim Rooney says there is already a professional standard in place — Reg BI — that requires investment professionals to act in their clients’ best interest now. The risk with Galvin’s proposal, Rooney says, is that “everyday savers lose access to services.”
The chamber has plenty of company. Also in alignment: the Massachusetts Business Roundtable, the Massachusetts Competitive Partnership, the Massachusetts Taxpayers Foundation, and Associated Industries of Massachusetts. (These groups, of course, have financial firms as members that would be directly affected.) The companies that echoed these concerns in comments to Galvin’s securities division included MassMutual, Fidelity, LPL Financial, and Morgan Stanley.
Among their complaints: Galvin’s rule could upset the public bond market, potentially adding costs and complexities for municipalities that rely on banks to underwrite their debt.
Those banks would now need to get an intermediary involved if they want to sell the bonds they underwrote to individual investors, according to Jon Skarin of the Massachusetts Bankers Association. Skarin says his association wants Galvin to wait until after the new federal rule takes effect next summer, to fully consider the impact, before trying to implement such a dramatic reform.
Not everyone who weighed in opposed Galvin’s move. Attorney General Maura Healey’s office filed supportive comments, for example. And the Public Investors Advocate Bar Association backed Galvin’s stance that the fiduciary standard should apply to all investment professionals, regardless of their title or license. One concern involves pros who are dually registered as advisers and brokers. The association doesn’t want them to be able to “switch hats” to a lower standard, depending on their form of compensation. Christine Lazaro, the group’s president, says Galvin’s approach would impose an ongoing fiduciary standard for brokers, to the benefit of individual investors.
Galvin declined to comment about the business backlash; a spokeswoman says any comment he makes now could be construed as interfering with the review process. His office still needs to put out a final version of the rules, and then allow a new comment period that includes a public hearing.
Business leaders are privately bracing for Galvin to move ahead with his plan, regardless of the criticism. But some are still willing to publicly put up a fight — while they can.