ADISA Testifies at Massachusetts Securities Division Hearing

Jan 13, 2020

As we previously reported, the Massachusetts Securities Division has proposed to amend 950 Mass. Code Regs 12.200 to add standards of conduct applicable to broker-dealers, agents, investment advisers and investment adviser representatives. On January 7th, the Division held a public hearing regarding this proposal, where ADISA Legislative & Regulatory Committee member John Grady, a partner with Practus, LLP, testified to bring to light concerns with the proposed regulation and to underscore the importance of having any regulation take into account the unique nature of alternative investments.

Grady’s testimony addressed the important role that alternative investments play in providing portfolio diversification. Along with other speakers, he noted that the proposed regulation would operate more favorably toward fee-based accounts and non-transaction based compensation arrangements. Grady stressed that alternative investments often involve transaction-based compensation, and requested that the Division give due consideration to ensuring that the more episodic version of any apply in the case of alternative investments even where compensation is paid after the initial purchase. He continued his testimony with a request that the Division provide more clarity around its “best of” standard found in the current draft regulation, noting that investors would not be served well by an approach that places cost and remuneration over other important factors. Grady concluded his remarks by arguing that, on the assumption that issuers and financial advisors will have to comply with a patchwork of fiduciary regulations across the country, it is critical that these regulations leave room for financial advisors to employ alternative investments for their clients' benefit without fear of being held liable merely for recommending something other than the cheapest, least remunerative option available.

At the end of December 2019, ADISA submitted a letter to the Division in response to the Division’s request for comment on its fiduciary proposal. ADISA's comment letter encourages the Division to consider the following:

  1. "Non-traded" investment products are distinct from their publicly-traded counterparts and are typically marketed and sold in a different way.
  2. ADISA applauds the division for recognizing an episodic duty, similar to the State of Nevada.
  3. The Division should add greater clarity to the scope and application of the duty of due care.
  4. Recognizing the unique nature of the alternative marketplace, the Division should add greater clarity to the "best of" language.
  5. The proposal should explicitly limit its application to retail investors who are legal residents of Massachusetts or who reside in Massachusetts.
Signed by 2019 ADISA President Greg Mausz, the letter was drafted by John Grady and Thomas Rosenfield of ADISA's Legislative & Regulatory Committee. You can read the letter in its entirety here.

ADISA will continue to monitor anything forthcoming with the Massachusetts Securities Division’s proposed fiduciary regulations, and will keep members apprised as events take place.