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Bill Galvin gets an earful from Wall Street over proposed stricter rules for brokers

January 8, 2020

Secretary of State Bill Galvin’s war with wall street moved to a new battleground on Tuesday: a packed State House hearing room.

One by one, representatives of various business groups and financial firms squeezed into the chamber, many from out of state, to sound off about what they described as the perils and pitfalls inherent in Galvin’s new standard of conduct for broker-dealers.

Galvin, whose office oversees stockbrokers and other securities businesses, stirred up serious controversy when he proposed last year to impose a uniform “fiduciary conduct standard” on the brokerage industry to protect individual investors.

Galvin is trying to pull off for Massachusetts what the US Department of Labor could not do for the country when an Obama-era standard for brokers was struck down by a federal appeals court in 2018.

Currently, brokers paid with commissions are held to a lower threshold than fee-based financial advisers, and they are only required to recommend investments that are deemed suitable for customers. Financial advisers, who earn fees that are based on the amount of money they manage, must go beyond that and put their customers’ best interests first. (Many companies offer both kinds of services.)

Things are about to change on the federal level, though. The Securities and Exchange Commission voted last year to adopt a tougher standard for brokers, albeit one that falls short of the one that exists for financial advisers. Brokerages need to comply with that new rule — dubbed Regulation Best Interest, or “Reg BI” — by the end of June.

The various and sundry Wall Street types who went to the State House pleaded with Galvin’s Securities Division to put the state plan on hold, to give Reg BI a chance to work first.

The upcoming federal regulation, they said, will require brokers to make investments that are in their customers’ best interests and to disclose potential conflicts.

Sounds good, right? Not enough for Galvin. His rules would impose new standards for brokers to avoid conflicts of interest and to conduct ongoing account monitoring.

Susan Neely, chief executive of the American Council of Life Insurers, described Galvin’s proposal as elitist, because it would make brokerage services more expensive, possibly putting them out of the reach of many everyday investors.

Kenneth Bentsen, CEO of the Securities Industry and Financial Markets Association, said it could prompt many firms to limit or entirely eliminate commission-based brokerage services in Massachusetts.

It wasn’t just the big national associations that showed up, though.

Pamela Everhart, head of regional public affairs for Boston-based Fidelity Investments, said the vast majority of low- and middle-income consumers prefer point-of-sale brokerage advice over the more expensive option of fee-based advisers who provides ongoing counsel.

Jay Ash of the Massachusetts Competitive Partnership talked about how, in his opinion, small businesses are already overregulated. Jim Rooney, CEO of the Greater Boston Chamber of Commerce, said brokers and investment advisers shouldn’t be lumped together because they provide considerably different services. Both Rooney and Ash said Galvin’s proposal could hurt the state’s economic competitiveness.

The room was packed with opponents. But Galvin has some support. The Public Investors Arbitration Bar Association submitted a letter saying that the fiduciary-duty standard should apply to all forms of investment advice, to eliminate confusion and protect consumers.

AARP Massachusetts and Attorney General Maura Healey’s office have expressed similar sentiments.

Galvin didn’t attend the hearing, but the criticism came as no surprise to him. He has been hearing it for a while now – essentially since he proposed the idea last June, after the SEC approved Reg BI.

In an interview, Galvin said the industry raised similar issues when the Department of Labor tried this. Galvin said he has cracked down on enough shady sales contests to know brokers need more oversight, not less. He welcomes ideas from the industry that would improve his approach. But he’s not backing down from putting it in place.

He said he’s skeptical the change will hinder investors’ choices. In particular, Galvin seemed incredulous about waiting to see how Reg BI works out. No way. He called the federal rule “watered down, pathetic” — a regulation drawn up with the industry in mind, not the investor.

Massachusetts would certainly be an outlier if Galvin moves ahead as expected, although at least two other states, New Jersey and Nevada, have been weighing similar rules.

Galvin would prefer to see his plan adopted at the federal level, with rules like President Obama’s Department of Labor put forward. Until that happens, Galvin seems more than willing to tangle with Wall Street over this issue — even if he remains one of the few state regulators willing to do so.

Read this story on the BostonGlobe.com.

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