The Massachusetts Securities Division (“MSD”) has announced the adoption of new rules requiring that investment advisers registered with the MSD provide, to clients and prospective clients, an additional one-page stand-alone disclosure document specifically detailing the adviser’s fee schedule. This new disclosure document or “Fee Table” will need to be “updated and delivered consistent with the existing requirements for Form ADV (including the Brochure).” The new rules, which were adopted pursuant to the MSD’s notice and comment process, take effect—and will be enforced—commencing on January 1, 2020.
While only applicable to advisers registered with the MSD, the new rules requiring the Fee Table could portend similar future action by additional states. Moreover, the new rules come on the heels of the SEC’s June 5th high profile standard-of-conduct releases (which we have previously chronicled) that also include a new stand-alone disclosure document for SEC-registered advisers to be known as Form CRS. If the MSD’s actions here are in fact echoed by additional states, it could cause potential headaches for the RIA industry, as this would require RIAs operating in multiple states to conform to multiple differing disclosure document regimes. Additionally, with the new Form CRS (applicable to SEC-registered advisers only) beginning to circulate at about the same time, an assortment of new documents being presented to clients may cause marketplace confusion as well.
In its Adopting Release implementing the new Fee Table rules, the MSD addresses the written comments (31 in total) that it received as part of the rulemaking process, in an effort to justify the need for its new Fee Table and bat-back critics. According to the MSD, the Fee Table is “intended to distill and present information about the investment adviser’s fees and services in a more visually accessible format than the often dense narrative found in [a Form ADV] Brochure.” Notably, the MSD takes a few swings at the current Form ADV format, describing many Brochures as “difficult for many investors to understand,” observing that “clients often do not read the Brochure or know where to find fee information in their account statements, contracts, or the Brochure,” finally noting that “[a]lthough changes to Form ADV might prove helpful in these regards, it is not within the Division’s unilateral authority to effect such changes.” The MSD claims that it obtained “valuable feedback” from “current and prospective clients” as part of its “Fee Table working group,” and that “[g]enerally, the clients and prospective clients surveyed found the Fee Table easier to use than the narrative disclosure in the [Form ADV] Brochure.”
While the immediate effects of this new disclosure requirement are entirely limited to MSD-registered advisers, we do worry somewhat as to the potential underlying trend at work. As noted, if other states follow suit and design their own versions of the Fee Table, there could be a plethora of differing disclosure documents required in varying jurisdictions. The MSD, for its part, does not appear concerned; indeed, it notes that adoption of a uniform model Fee Table (presumably by NASAA) for use by multiple jurisdictions may be in order.
While beyond the scope of this post, we further note that on the same day as it adopted its Fee Table rules, the MSD also put out for comment another rulemaking proposal that would establish an MSD-specific fiduciary standard-of-conduct for broker-dealers and investment advisers alike “based on the common law fiduciary duties of care and loyalty.” This standard-of-conduct proposal is a broadside at the SEC’s recently-approved Regulation Best Interest (“Reg BI”), as it articulates the position of the MSD and many consumer advocates that Reg BI fails in going far enough and that a unitary fiduciary standard-of-conduct for broker-dealers and investment advisers alike is needed. In making this move, the MSD joins New Jersey and Nevada in advancing proposals for a state-specific fiduciary standard applicable within their borders. Notably, because the SEC, in its Reg BI release, declined to preempt state-level standards, additional balkanization on the standard-of-conduct matter will likely be forthcoming.
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