The Massachusetts securities regulator is seeking to revoke Robinhood Markets’ license in the state, a move that the brokerage firm says could prevent “millions” from accessing its service.
William Galvin, the head of the state’s securities division, said in an administrative complaint that Robinhood has “continued a pattern of aggressively inducing and enticing trading among its customers—including Massachusetts customers with little or no investment experience.”
Robinhood pushed back against Galvin on Thursday, filing a lawsuit seeking to quash the new state rule that holds brokers accountable for a fiduciary standard of care, which means putting customers’ interests above their own.
Adam Gana, a securities attorney at Chicago law firm Gana Weinstein LLP, doesn’t foresee the trading platform losing its license in Massachusetts. He says that the move by Galvin is meant to force Robinhood into changing its practices to better protect their customers.
Galvin’s administrative complaint against Robinhood is a “test case” for the new regulation, the brokerage said in its suit filed in a Massachusetts state court. Galvin’s “new rule is invalid under both Massachusetts and federal law,” as it contradicts case law that says brokerage firms aren’t fiduciaries of their customers, the company said.
“This lawsuit is another example of Robinhood’s complete rejection of responsibility to their customers,” Galvin said in a statement. “It’s a tactic I’ve seen employed by many parties subject to enforcement actions in my tenure.”
Massachusetts’ new rule doesn’t apply to Robinhood as it is a “self-directed” brokerage firm that doesn’t make investment recommendations or provide investment advice, according to Robinhood. “By trying to bring Robinhood within the scope of the new rule, the Secretary violates the basic administrative law requirement that regulators define their rules clearly enough so that regulated entities can know what is expected of them,” the company said.
In a blog post on its website, the brokerage said it doesn’t “believe our customers are naive as the Massachusetts Securities Division paints them to be.”
—With assistance from Matt Robinson.
This article was provided by Bloomberg News.