Brokers Beware – The Massachusetts Fiduciary Rule is Here to Stay

By: Richard Kerr, Pablo Man, Eden Rohrer and Raymond Jensen

On 25 August 2023, the Massachusetts Supreme Judicial Court reversed a Massachusetts Superior Court ruling and denied Robinhood Financial LLC’s attempt to block the implementation of Massachusetts’s unique fiduciary duty rule, adopted in February 2020 within weeks of the final adoption of the SEC’s Regulation Best Interest, which imposes the duties of care and loyalty on broker-dealers (Fiduciary Rule). A summary of the Fiduciary Rule is available here. Robinhood’s action to overturn the Rule was brought after the Commonwealth of Massachusetts brought an administrative action accusing Robinhood of violating Fiduciary Rule with its video game-like design and marketing tactics.

The Supreme Judicial Court decision overturned the initial Superior Court Ruling, which found that the Massachusetts Securities Decision had overstepped the authority granted to it under the Massachusetts Uniform Security Act. The court rejected Robinhood’s arguments, determining that the Fiduciary Rule does not override common-law protections available to investors, that the Fiduciary Rule is not an exercise of “an impermissible delegation of legislative power,” and that the rule is not preempted by the SEC’s standard of care imposed on broker-dealers under Regulation Best Interest. The ruling noted that while the SEC is aware of state laws imposing fiduciary duties on broker-dealers, the SEC declined to express its views on preemption and expressly deferred to the courts in this regard when it adopted Regulation Best Interest.

With this ruling, broker-dealers operating in Massachusetts will be subject to a higher standard of care than that imposed by federal regulation and by almost any other state. The Court’s determination that Regulation Best Interest establishes a floor and that states are permitted to establish higher standards could embolden other states to adopt similar laws and will cause broker-dealers to have to monitor the standard of care in each jurisdiction where they operate, as opposed to adhering to a single standard. Further, the decision is likely to reduce investor options in Massachusetts as broker-dealers choose to exit states with higher standards.

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