On an appeal from a Massachusetts Securities Division (“MSD”) administrative action, the Massachusetts Supreme Judicial Court (“SJC”) held on August 25, 2023 that online brokerage firm Robinhood Financial LLC violated the Massachusetts Uniform Securities Act by engaging in “unethical or dishonest conduct.” MSD defines this phrase to require broker-dealers that provide investment advice to retail customers to comply with a statutorily defined fiduciary duty. See 950 Code Mass. Regs. § 12.207(1)(a) (2020) (“Fiduciary Rule”). Unlike prior standards of care, this rule does not differentiate between broker-dealers and investment advisors. Robinhood Financial challenged the Fiduciary Rule arguing that the Secretary of the Commonwealth (the “Secretary”) overstepped his authority in promulgating the rule. The Secretary argued that that the Fiduciary Rule is needed to address the “increasingly blurred lines” between broker-dealers and investment advisors. In overturning the decision of the Superior Court in favor of Robinhood on the parties’ cross-motions for judgment on the pleadings, the SJC reviewed the historical differences between duties of broker-dealers versus investment advisors. The SJC found that the “increasingly blurred lines” are due to a number of factors including that broker-dealer firms have expanded the types of services and products they offer to retail customers, often providing advice about transactions and investment strategies. Also, that firms have changed their marketing to include different types of titles for registered representatives such as “financial advisor” or “financial consultant.” The SJC found that compensation models have morphed and, rather than charging commissions, some firms draw revenue from “payments for order flow.” The SJC agreed with the Secretary that Regulation BI is no longer sufficient to protect investors who no longer understand the difference between broker-dealer firms and investment advisors. The SJC found that Regulation BI constitutes a “regulatory floor” that does not foreclose state regulation to more clearly protect investors.
Winget, Spadafora & Schwartzberg, LLP is closely monitoring these developments. If you would like guidance in complying with this new standard, please do not hesitate to contact our Securities Litigation Practice Group.
To read the entire Robinhood opinion, click here.
