A decision from a Massachusetts court in a case involving Robinhood, the online trading platform, could mark a turning point in how states regulate broker/dealers around the country.

The Massachusetts Supreme Judicial Court found that the state acted properly in holding broker/dealers to the fiduciary standard of care when providing investment advice.

Longstanding practice has been to require broker/dealers to meet a less stringent standard -- showing that they acted in “good faith” in their recommendations, fully disclosed all relevant information and took steps to avoid misleading clients.

The stricter fiduciary standard requires professionals to show they acted in the best interest of clients. That standard has historically applied to a different category of professional – investment advisers who give investment advice and provide ongoing management of investment portfolios. Now, in Massachusetts, both broker/dealers and investment advisers will be required to follow one standard.

Secretary of the Commonwealth William Galvin created the Massachusetts Fiduciary Duty Rule under the Massachusetts Uniform Securities Act in recognition of what the court described as an “increasingly blurred line between broker-dealers providing investment advice and investment advisors.”

The text of the rule deems it “unethical and dishonest conduct” if a broker/dealer fails to act “in accordance with a fiduciary duty to a customer when providing investment advice or recommending an investment strategy, the opening of or transferring of assets to any type of account, or the purchase, sale, or exchange of any security.”

Massachusetts sought to enforce the regulation against Robinhood, claiming that the online trading platform encouraged risky trading. Robinhood challenged the rule in a December 2020 lawsuit, arguing that Secretary Galvin exceeded his statutory authority and that Securities and Exchange Commission Regulation BI had already established a federal "best interest" standard for broker/dealers on client matters, thus preempting the state regulation. The trial court sided with Robinhood in its case, a ruling that has now been reversed by the Massachusetts high court.

Ruling’s Impact

During argument before the Massachusetts court, Robinhood argued that upholding the new rule would mean that “nearly every stockbroker in the state could be a fiduciary” – a concern that we share and that could have broader implications nationally.

The Massachusetts precedent may lead to more states adopting the fiduciary duty role for broker/dealers, which has been widely discussed nationwide for years.

Should that happen, broker/dealers would have to review obligations in each state individually to determine its precise standard, as opposed to aligning to the nationwide “best-interest” standard under Regulation BI. This further complicates the already complex efforts to comply with registration requirements under state Blue Sky laws.