Massachusetts Case Against Robinhood May Proceed, State Court Judge Rules
As we last addressed the matter in April, online brokerage firm Robinhood Financial, LLC (Robinhood, or the Company) is currently embroiled in legal proceedings in Massachusetts. The Company is defending against an amended administrative case brought by the Massachusetts Securities Division (Division), which seeks to revoke Robinhood’s state broker-dealer license. Robinhood has also filed a lawsuit and emergency motion against the Division and William F. Galvin, Secretary of the Commonwealth, to prevent the Massachusetts securities regulator’s case from proceeding. As recently reported, on May 27, 2021, a Massachusetts judge will allow the securities regulator to proceed with its case against Robinhood, setting aside Robinhood’s claims for future consideration.
To briefly recap the matter, Robinhood’s battle with Massachusetts began after the Division filed its first administrative action on December 16, 2020, accusing Robinhood of violating the Massachusetts Uniform Securities Act by “aggressively marketing itself to Massachusetts investors without regard for the best interests of its customers and failing to maintain the infrastructure and procedures necessary to meet the demands of its rapidly growing customer base.” This action stemmed from the recently enacted Massachusetts Fiduciary Rule (MA Fiduciary Rule), which imposes a fiduciary duty on in-state broker-dealers and their agents when providing customers with investment advice or recommending an investment strategy.
The Division’s amended administrative action, filed on April 15, 2021, built upon these claims and sought to revoke Robinhood’s license, in connection with the recent controversy related to Robinhood’s halting of trading in GameStop and other “meme stocks” during a volatile session in late January 2021. The Division has expressed concern that Robinhood “continues to entice and induce inexperienced customers into risky trading.” On the same day that the Division filed its amended action, Robinhood responded with its own lawsuit and emergency motion, arguing that the MA Fiduciary Rule is invalid on its face and as applied to the broker-dealer. Essentially, Robinhood is asserting that the state rule exceeds the scope of analogous federal rules (the SEC’s Regulation Best Interest or “Reg BI”) and, moreover, is inapplicable to the Company because Robinhood offers a self-directed brokerage platform “that does not make investment recommendations or provide investment advice.”
In the April 27, 2021 ruling by Suffolk County Superior Court Judge Kenneth W. Salinger—denying Robinhood’s motion for a preliminary injunction—it was determined that the public interest would be served best by allowing the Division’s administrative case to proceed. Judge Salinger did not decide on the validity of the MA Fiduciary Rule, however, and indicated that Robinhood could continue its legal challenge although it may need to be paused pending resolution of the Division’s case.
If and when the court finally considers Robinhood’s challenge to the MA Fiduciary Rule, the outcome could have broad implications on the brokerage industry, as other states are mulling efforts to impose a fiduciary duty on broker-dealers. While a ruling on the validity of the MA Fiduciary Rule would not directly affect other states’ regulatory regimes, it would likely have some influence, nonetheless.
The attorneys at Giarrusso Law Group LLC have considerable experience with issues unique to the financial services industry, including SEC, FINRA, and state-level rules and regulatory developments. If you have a question regarding this recent announcement or any other regulatory matter, you may contact us at (201) 771-1115 or info@gialawgroup.com for a no-cost, no-obligation, confidential consultation.