The Supreme Judicial Court (“SJC”) determined in Robinhood Financial LLC vs. Secretary of the Commonwealth that where the distinction between investment advisors and broker-dealers had become blurred, the Secretary of the Commonwealth had the authority to enhance a broker-dealer’s fiduciary obligations to their customers.
Traditionally, investment advisors and broker-dealers have been distinct, with investment advisors providing continuous investment advice and account management for a fee, and broker-dealers facilitating and executing a customer’s securities transaction, earning commissions. Investment advisors are subject to the “full complement” of fiduciary duties (i.e., utmost good faith, full and fair disclosure of material facts, and reasonable care to avoid misleading clients) that correspond with their role as providing trusted advice. Broker-dealers, with a more limited role, have been subject only to traditional agency principles (i.e., reasonable basis for a transaction or strategy based on information obtained through reasonable diligence). In recent years, however, the expansion of broker-dealer offerings, marketing, and compensation models has begun to blur this distinction.
Robinhood Financial LLC (“Robinhood”) is one such “blurred” broker-dealer. It is a website- and application-based trading platform “democratizing” finance by providing opportunities for customers to engage in securities trading. Robinhood offers suggested trades and advice to customers but, as a broker-dealer, does so without being subject to the same fiduciary obligations of investment advisors. After an investigation by the Secretary of the Commonwealth revealed that many investors mistakenly believed that broker-dealers had a fiduciary obligation equal to that of investment advisers, in March 2020, the Secretary promulgated the “fiduciary duty rule,” pursuant to the Massachusetts Uniform Securities Act (“MUSA”). The rule classifies broker-dealers’ duties to their customers as similar to that expected of investment advisors by making it an unethical or dishonest practice for broker-dealers to act with any less of a fiduciary duty. Robinhood deemed itself exempt from the rule, believing that as a self-directed brokerage firm, it did not make investment recommendations or provide advice. The Secretary disagreed and brought an administrative action against Robinhood alleging that Robinhood’s continued recommendations to customers without consideration of the customer’s best interests violated the fiduciary duty rule. Robinhood sued, challenging the Secretary’s authority to enact the rule. After a Superior Court judge found in favor of Robinhood, the Secretary was granted direct appellate review by the SJC.
Arguing before the SJC, Robinhood first relied on tradition. The SJC rejected this argument, noting that where the role of broker-dealers had become inconsistent with traditional industry norms, broker-dealer obligations could also veer. Robinhood also argued that the rule was inconsistent with state and federal laws, but the SJC determined that MUSA did not require the Secretary to issue rules uniform with comparable federal and state law, that Massachusetts common law stood “shoulder-to-shoulder” with the rule and was not abrogated by it, and that article 30 of the Massachusetts Declaration of Rights, which prevents the legislature from delegating the power to make laws, was not violated because the rule was merely the Secretary defining an unlawful conduct or practice.
Finally, Robinhood argued that the new rules were inconsistent with the Federal Securities and Exchange Commission’s rules on broker-dealers, and that any enhancements of broker-dealers’ obligations to customers would threaten the economic viability of the broker-dealer industry. The SJC rejected this argument as well, finding that the SEC’s rules established a floor, not a ceiling. Accordingly, the Secretary was free to establish greater protections for customers and require that broker-dealers act with a greater fiduciary duty to their customers.