Massachusetts Upholds Strict Fiduciary Law, Denying Robinhood’s Challenge

The state's highest court has unequivocally rejected Robinhood Markets Inc.'s attempt to block Massachusetts' strict broker-dealer fiduciary law in a significant legal battle. Supreme Judicial Court Justice Dalila Argaez Wendlandt delivered a unanimous ruling that upholds Massachusetts Secretary of State William Galvin's authority to implement a higher standard of care for brokers, emphasizing that this authority aligns with his extensive powers under state law.

This landmark decision effectively solidifies the fiduciary duty that brokers owe to their customers in the state of Massachusetts. It marks a pivotal moment in the ongoing debate surrounding the responsibilities of broker-dealers and underscores the state's commitment to safeguarding investors.

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The ruling overturns a prior victory secured by Robinhood in a lower court, which had cast uncertainty over Massachusetts' attempt to impose stricter regulations on brokers than those outlined in the SEC's Regulation Best Interest.

Secretary Galvin, a vocal advocate for investor protection, hailed the decision as a vindication of his Securities Division's role in aggressively policing broker-dealer misconduct. He has consistently argued that brokers should adhere to a common standard, particularly in an era where retail investors often struggle to distinguish between broker-dealers and investment advisers.

The legal battle between Massachusetts authorities and Robinhood began in 2020, when Galvin accused the online brokerage of turning trading into a game and luring inexperienced investors into risky behaviors. Galvin's attempt to revoke Robinhood's state license sparked a counterattack from the company, which sued him for allegedly violating both Regulation Best Interest and the Massachusetts Uniform Securities Act through his fiduciary regulation.

One of the main arguments put forth by Robinhood is that Galvin's fiduciary rule might make some investment options economically unviable for broker-dealers, potentially limiting market access for Massachusetts customers. The U.S. Chamber of Commerce threw its support behind Robinhood in this contentious legal battle.

While this ruling represents a significant victory for investor protection advocates and regulators, it's worth noting that the legal battle is not over. A second hearing will take place in the lower court following the Supreme Judicial Court's decision.

Stephen Hall, the legal director of Better Markets, an advocacy group promoting transparency and fairness in financial markets, highlighted the broader issue at hand. He stated that brokers who prioritize their financial interests over those of their clients often harm ordinary investors. Massachusetts' move to mandate brokers act in the best interests of their clients signifies a commitment to closing regulatory gaps left by the SEC's "best interest" rule, which has faced criticism for not offering adequate investor protection.