Massachusetts’ highest court hands a win to state-level securities regulation in Robinhood case

Massachusetts’ highest court ruled that the state does have the authority to enforce its own securities standards for brokerages in a “landmark” decision that has some observers hoping reforms will soon follow.

“I am pleased and gratified that the Court has ruled that our Fiduciary Rule is an appropriate exercise of my authority under the Massachusetts Uniform Securities Act,” Secretary of the Commonwealth William Galvin said following the Friday ruling by the Supreme Judicial Court.

“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,” he continued.

Galvin in 2020 filed a complaint against Robinhood, which offers trading via its website and mobile apps, complaining of the platform’s gamification of trading by advising customers, the SJC summarizes, “without considering whether those recommendations were in each customer’s best interest.”

“We are disappointed in today’s decision and remain committed to providing access to the markets for our Massachusetts customers,” Lucas Moskowitz, Robinhood’s deputy general counsel and head of government affairs, said in a statement. “We are in the process of reviewing the opinion and assessing next steps in this matter.”

Robinhood, Galvin wrote in his complaint, “targeted young individuals with little or no investment experience,” with categories like “100 Most Popular” stocks or “Top Movers” akin to encouraging “frequent, risky, and unsuitable trading” by the inexperienced investors.

When Galvin moved to enforce this action, Robinhood challenged his authority to do so as well as claiming, as a “self-directed” brokerage, no responsibility toward investment advice, to which a lower court judge ruled in favor. Galvin in turn appealed, landing the case at the SJC.

The disagreement comes from traditionally different standards for broker-dealers, which trade stocks at their customer’s direction for a fee, and investment advisors, which manage customers’ portfolios and provide investment advice.

“Over time, the once-clear dichotomy between the services offered by broker-dealers, on the one hand, and investment advisers, on the other, has ‘blurred,’” SJC Justice Dalila Argaez Wendlandt wrote in the ruling.

The federal Securities and Exchange Commission tried to reconcile its regulation of the blurring distinction with its Regulation Best Interest, or Reg BI, establishing a standard of conduct for the businesses when recommending a trade.

The proposals “fall short of providing the reforms needed to protect retail investors when they receive advice and recommendations from broker-dealers,” Galvin wrote in an August 2018 letter to the SEC, which stressed that such businesses “must provide advice under a true fiduciary standard.”

Knut Rostad, the president of the Institute for the Fiduciary Standard, a Virginia-based nonprofit, applauded the SJC’s decision Friday and said he hopes the move will clear the way for other states to do likewise.

“The states in various ways have played second fiddle to the Securities and Exchange commission for regulating securities and advice. There has been a perception that it’s difficult or not possible for states to regulate in a way that is different or more rigorous than the feds,” Rostad told the Herald by phone Friday.

He said Galvin in this move was “enlightened and progressive” and that “There’s no question whatsoever in my mind that there will be other state regulators looking at this opinion (and then) looking at their own state laws to see if they have an opportunity to do a similar sort of thing.”