Massachusetts’ Fiduciary Rule Revived by State Supreme Court

Robinhood’s bid to undo the Bay State’s fiduciary rule holding broker-dealers to the same standard as investment advisers hit a roadblock after the state’s high court reversed a lower court’s ruling that the Massachusetts Secretary of Commonwealth lacked authority to adopt the rule.

The Aug. 25 ruling (Robinhood Financial LLC vs. Sec’y of the Commonwealth, Mass., No. SJC-13381, oral argument 5/3/23) by the Massachusetts Supreme Judicial Court reversed a March 2022 ruling by Suffolk County Superior Court Judge Michael Ricciuti that invalidated the March 2020 rule imposing a heightened fiduciary conduct standard on broker dealers and agents. The case has been remanded back for further proceedings.

While Massachusetts Secretary of Commonwealth William Galvin did not file an appeal to the lower court’s ruling, the state’s high court is required to review challenges to government agency regulations. This case concerns the question whether, by promulgating the fiduciary duty rule, the Massachusetts Secretary of Commonwealth overstepped the bounds of the authority granted to him under Massachusetts Uniform Securities Act (MUSA) and lacked the authority to adopt the rule. 

“We conclude that he did not. We further conclude that the fiduciary duty rule does not override the common-law protections available to investors, that MUSA is not an impermissible delegation of legislative power, and that the rule is not preempted by the Securities and Exchange Commission's (SEC) determination to impose a national ‘best interest’ standard of care on broker-dealers,” wrote Justice Dalila Wendlandt.  

Preemption Argument?

The high court further observed that Robinhood's preemption argument is "particularly weak" because Congress and the SEC were aware of State laws imposing fiduciary obligations on broker-dealers and declined to express an intent to preempt those laws.

The original case was brought in April 2021 by online brokerage Robinhood Financial, which was the subject of the state’s first enforcement action of the new fiduciary rule, in which Massachusetts charged the online trading platform with taking advantage of inexperienced investors. 

Galvin had brought an administrative enforcement complaint against Robinhood in December 2020, contending, among other things, that the company engaged in “dishonest and unethical” business practices over what he argued were its “aggressive tactics” to attract inexperienced investors, its use of gamification strategies to “manipulate” customers, and its failure to prevent frequent outages and disruptions on its trading platform. 

In particular, the Secretary had alleged that Robinhood provided investment recommendations to its Internet-based customers without considering whether those recommendations were in each customer's best interest, contending that this conduct violated Robinhood's fiduciary duties of care and loyalty under the fiduciary duty rule. In response, Robinhood denied the allegations, maintaining that, as a “self-directed” brokerage firm, it does not make investment recommendations or provide investment advice.

The state’s Supreme Judicial Court sided with Galvin. “Unlike prior standards of care, which differentiated between broker-dealers and investment advisers in view of their traditionally distinct investment services and offerings, the rule brings the fiduciary obligations of broker-dealers in line with those of investment advisers, making uniform the duties owed by those engaged in the business of providing investment advice regardless of label,” Justice Wendlandt further explained.  

“We therefore reverse the judgment entered by a Superior Court judge on the pleadings in a civil action challenging the validity of the fiduciary duty rule, and we remand the matter for further proceedings,” the order further stated. 

In a statement welcoming the decision, Galvin said, “This landmark decision affirms the fiduciary duty of brokers to their customers and vindicates the role of my Securities Division to principally, but aggressively protect investors and police broker-dealer misconduct. The rule that has been upheld by the Supreme Judicial Court today will give the highest protections to Massachusetts investors when brokers provide investment advice.”

Galvin added that he looks forward to proceeding with the state's administrative case against Robinhood, which seeks to revoke the company’s broker-dealer license in Massachusetts.

For its part, Robinhood’s deputy general counsel and head of government affairs reportedly said that the company is reviewing the opinion and evaluating its options.