Massachusetts judge strikes down state’s fiduciary rule

A Massachusetts judge Wednesday struck down a regulation imposing fiduciary duty on brokers in the state.

The ruling came in a case brought against the state’s top securities regulator, William Galvin, by the online brokerage Robinhood Financial, an arm of Robinhood Financial Markets Inc. Robinhood filed its suit in April 2021 in response to a suit filed by Galvin in December 2020.

Galvin argued that Robinhood’s practices in its online trading app violated a state investment-advice rule that went into force in September 2020. The regulation imposed a fiduciary duty on brokers, a standard that's not currently applied to them, and required brokers to make financial recommendations without regard to their own financial interests.

The court loss dealt a blow to Galvin’s effort to establish an advice standard that he asserted was higher than Regulation Best Interest, the broker standard established by the Securities and Exchange Commission.

A leading financial planner said Galvin, an aggressive state regulator, misfired with his rule.

“We don't need to apply a fiduciary standard to broker-dealers providing advice to lift standards,” Michael Kitces, head of planning strategy at Buckingham Wealth Partners, tweeted Thursday. “We simply need to clarify the line when a broker providing advice triggers [registered investment adviser] status. And then the advice will be regulated as fiduciary under current law!”

Kitces is co-founder of the XY Planning Network, an online platform of financial planners. The group is advocating that a bright line be drawn between brokers and investment advisers, who owe a fiduciary duty to clients.

“In other words, let brokers be brokers and advisers be advisers (the alternative approach that @XYPlanning advocated for Massachusetts in the first place), and regulate each according to their own standards,” Kitces tweeted.

Under the ruling, Galvin can still pursue charges against under brokerage laws, Kitces said.

“The only issue here is that it’s not a fiduciary advice issue,” he tweeted.

In his December 2020 complaint, Galvin alleged that Robinhood targeted young people with little investment experience and used gamification strategies to entice them to make repeated trades. He said that violated the state’s fiduciary rule, which requires brokers to make recommendations without regard to their own financial interests.  

Robinhood argued in its suit against Galvin that Massachusetts investment advice rule is invalid under state and federal law.

On Wednesday, Suffolk County Superior Court Judge Michael Ricciuti ruled that Galvin had exceeded his authority in promulgating the fiduciary rule and that the measure was invalid.

Ricciuti held that the Massachusetts regulation improperly overrode the state’s common law for determining brokers’ duties to their customers. Ricciuti also said Galvin acted outside the bounds of his office by implementing an investment-advice rule that conflicted with the Securities and Exchange Commission’s Regulation Best Interest, the broker conduct standard.

Robinhood celebrated its win in court.

“The Massachusetts Securities Division has consistently mischaracterized and disparaged Robinhood’s platform and customers without any legal basis,” Dan Gallagher, Robinhood's chief legal and corporate affairs officer, said in a statement. “As the Court made clear, the Secretary's decision to act unilaterally and reject any effort at coordinating with federal and state authorities ‘supports the conclusion that by adopting the Fiduciary Duty Rule, the Secretary acted beyond his delegated authority.’”

Judge Ricciuti stayed his order for 30 days to allow Galvin to appeal.

“We are reviewing the decision and considering our options,” Debra O’Malley, a spokesperson for Galvin, wrote in an email.