William F. Galvin, the Massachusetts secretary of the commonwealth, is appealing a Superior Court judge’s decision, issued in March 2022, that struck down the state’s fiduciary rule.

Robinhood Markets, the Menlo Park, Calif., brokerage, filed a lawsuit in April 2021 to overturn the rule after the state accused the company of encouraging inexperienced investors to place risky trades on its platform, a pioneer in commission-free trading. Galvin’s department also sought to revoke Robinhood’s broker-dealer license in the state.

Judge Michael Ricciuti of the Suffolk County Superior Court said in a ruling last year that Galvin exceeded his authority in promulgating the state’s fiduciary rule. Robinhood had also argued that the Securities and Exchange Commission’s Reg BI, which became effective in 2019, pre-empts the Massachusetts regulation, which became effective in September 2020.

Galvin, arguably one of the toughest state fiduciary proponents in the country, appealed the ruling to the Massachusetts Supreme Judicial Court, the state’s highest court, in February, asking that it reverse Ricciuti’s decision and “vindicate the secretary’s power to protect retail investors.”

Oral arguments in the case are scheduled for May 3, a spokeswoman for Galvin said.

The Institute for the Fiduciary Standard and public interest group Better Markets both filed friend-of-the-court briefs in support of Galvin’s appeal.

"Barring a fiduciary rule is legally suspect and lets conflicted advice that may be in investors' worst interest flourish," Knut Rostad, president of the Institute, said in an interview.

Rostad and Tamar Frankel, Professor of Law Emerita, Boston University School of Law, argued in the Institute's brief that the fiduciary rule does not conflict with federal law nor Massachusetts common law, nor does the SEC’s Regulation Best Interest pre-empt the right of states to lay down their own fiduciary rules to protect investors.

The Massachusetts Securities Division adopted the fiduciary rule “to ensure a minimum level of protection for [Massachusetts] citizens not guaranteed by the U.S. Securities and Exchange Commission’s disclosure-oriented Regulation Best Interest," according to the Institute.

Robinhood, Rostad and Frankel argued, “incorrectly asserts” that Massachusetts lacks authority to regulate conduct in Massachusetts. “This assertion is not supported by law or fact. Reg BI currently permits brokerages to profit from conflicted investment advice by exploiting retail investors’ trust. The Massachusetts Fiduciary Rule addresses this regulatory gap.”

Stephen Hall, a legal director and securities specialist at Better Markets, said that according to current Supreme Court jurisprudence, the Massachusetts rule “does not conflict with the SEC’s rule but simply adds an additional layer of protection for investors. And that’s a good thing, since the SEC’s Regulation Best Interest is a weak remedy for advisor conflicts of interest, one that has not lived up to the letter or spirit of [the Dodd-Frank Wall Street Reform and Consumer Protection Act] or the federal securities laws.”

The Institute for the Fiduciary Standard also argued that Reg BI has not improved advice quality. “To the extent that Reg BI aimed to improve the quality of advice brokerages provide to investors, it has fallen short. Instead, the record shows that brokerages continue to peddle the products which pay them the most, and firms’ internal policies and training procedures fail to adequately reduce investor harms stemming from the conflicts of interest that skew their advice toward high-fee products.”

The institute further asserted that conflicted advice continues to harm consumers. “In 2021, one year after Reg BI went into effect, the North American Securities Administrators Association surveyed over 2,000 firms, analyzing broker-dealer practices before and after Reg BI. NASAA found that most firms examined ‘have remained fairly stagnant and continue to operate precisely the same under Reg BI as they had under [the Financial Industry Regulatory Authority’s] suitability rule,’” the institute’s brief said.

As part of a settlement with multiple states, Robinhood agreed on April 6 of this year to pay up to $10.2 million in penalties to securities regulators for platform outages in 2020 and weaknesses in the firm’s monitoring, problems that the states’ officials say harmed investors.

In addressing the multistate agreement, NASAA’s president, Andrew Hartnett, said in a statement: “Robinhood repeatedly failed to serve its clients, but this settlement makes clear that Robinhood must take its customer care obligations seriously and correct these deficiencies.”