The highest court in Massachusetts upheld the state’s investment advice standard on Friday, handing a blow to Robinhood’s effort to kill a state regulation that imposes a fiduciary duty on broker-dealers for their investment advice and recommendations.
The ruling on Friday reverses a lower court decision that vacated the standard and handed a short-lived victory to Robinhood.
The question now is will other states press forward with their own fiduciary standard for broker-dealers and their representatives.
“Massachusetts took the fight on for investors and won a historic victory. I’d expect more states to grow bolder after this,” Knut Rostad, president of the Institute for the Fiduciary Standard, said during a press conference on the ruling.
“The court ruled that there is no legal impediment to stop Massachusetts from issuing or enforcing the rule. I think that will encourage a number of states that have considered increasing their standard to begin to immediately explore their own rule or step up their previous actions in this area. So yes, I think the decision will fuel state action,” Rostad said.
Massachusetts’s Secretary William Galvin said in a statement that he was “pleased and gratified that the court has ruled that our fiduciary rule is an appropriate exercise of my authority under the Massachusetts Uniform Securities Act.
“This landmark decision affirms the fiduciary duty of brokers to their customers and vindicates the role of my Securities Division to principally, but aggressively protect investors and police broker-dealer misconduct,” added the regulator, who proposed the tougher rule just nine days after the SEC voted to approve Regulation Best Interest, a non-fiduciary advice rule for broker-dealers. Galvin said at the time that the federal rule was not tough enough to protect investors.
Robinhood argued in court that Galvin did not have the authority to adopt a different rule and that the state rule is pre-empted by Regulation Best Interest. Following the latest ruling, the company said it plans to appeal the decision.
“Massachusetts gets this issue right and recognizes that the brokerage industry has changed since the 1930s,” Benjamin Edwards, a law professor at the University of Nevada William S. Boyd School of Law, said at the institute’s press conference.
“For decades now, brokerages have marketed themselves as trustworthy financial professionals while making outsize profits by betraying and exploiting that trust. The decision recognizes the reality that Regulation Best Interest sets a low floor for investor protection and that the states have the ability to demand better treatment for their retirees and savers,” Edwards continued.
As for whether states would adopt their own rules, he said “the decision may reinvigorate states that have explored their own rule in the past, including New Jersey and Nevada” and may also prompt greater “stakeholder pressure” on the SEC to improve the Reg BI standard.
“I would not expect states to move over night,” Edwards said. “They’re generally thoughtful and have limited resources so it’s very challenging to predict. But when it comes to Robinhood, I don’t see them being able to offer services in Massachusetts unless they change their business model."