Robinhood Fin. v. Sec'y of the Commonwealth
| Docket Number | SJC-13381 |
| Decision Date | 25 August 2023 |
| Parties | ROBINHOOD FINANCIAL LLC v. SECRETARY OF THE COMMONWEALTH & another. [1] |
| Court | United States State Supreme Judicial Court of Massachusetts Supreme Court |
Heard May 3, 2023.
Civil action commenced in the Superior Court Department on April 15, 2021.
The case was heard by Michael D. Ricciuti, J., on motions for judgment on the pleadings.
The Supreme Judicial Court granted an application for direct appellate review.
Phoebe Fischer-Groban, Assistant Attorney General, for the defendants.
Amy Mason Saharia (John S. Williams, of the District of Columbia Timothy P. Burke, &Jason S. Pinney also present) for the plaintiff.
The following submitted briefs for amici curiae:
Ben Robbins &Daniel B. Winslow for New England Legal Foundation.
Shay Dvoretzky, of the District of Columbia, Eben P. Colby &Marley Ann Brumme for Chamber of Commerce of the United States of America & another.
Robert S. Banks, Jr., of Oregon, &William A. Jacobson for Cornell Securities Law Clinic.
Timothy Cornell &Patrick J. Dolan for Public Investors Advocate Bar Association.
Elizabeth Aniskevich & Benjamin Davis, of the District of Columbia, Stuart Rossman, & Shennan Kavanagh for AARP & others.
Timothy Cornell &Patrick J. Dolan for Institute for the Fiduciary Standard & another.
Dennis M. Kelleher for Better Markets, Inc. James F. Radke & Dylan White for North American Securities Administrators Association, Inc.
Present: Gaziano, Lowy, Cypher, Wendlandt, &Georges, JJ.
Unlike the fabled "Prince of Thieves," who took from the rich to give to the poor,[2] the plaintiff Robinhood Financial LLC (Robinhood), is accused by the Secretary of the Commonwealth (Secretary) of taking advantage of unsophisticated investors to fill its own coffers by dispensing ill-suited investment advice to these customers and by encouraging them to engage in risky trading practices using its online trading platform. This conduct, the Secretary alleges, violated the prohibition of the Massachusetts Uniform Securities Act, G. L. c. 110A (MUSA), against "unethical or dishonest conduct or practices in the securities, commodities[,] or insurance business," G. L. c. 110A, § 204 (a) (2) (G) - a phrase that the Secretary has defined to require broker-dealers that provide investment advice to retail customers to comply with a statutorily defined fiduciary duty, see 950 Code Mass. Regs. § 12.207(1)(a) (2020) (). Unlike prior standards of care, which differentiated between broker-dealers and investment advisers in view of their traditionally distinct investment services and offerings, the rule brings the fiduciary obligations of broker-dealers in line with those of investment advisers, making uniform the duties owed by those engaged in the business of providing investment advice regardless of label. The rule, according to the Secretary, was needed to protect investors confused by the increasingly blurred line between broker-dealers providing investment advice and investment advisers.
This case concerns the question whether, by promulgating the fiduciary duty rule, the Secretary overstepped the bounds of the authority granted to him under MUSA. We conclude that he did not. We further conclude that the fiduciary duty rule does not override the common-law protections available to investors, that MUSA is not an impermissible delegation of legislative power, and that the rule is not preempted by the Securities and Exchange Commission's (SEC) determination to impose a national "best interest" standard of care on broker-dealers, 17 C.F.R. § 240.15l-1 (2019) (Regulation Best Interest).[3] We therefore reverse the judgment entered by a Superior Court judge on the pleadings in a civil action challenging the validity of the fiduciary duty rule, and we remand the matter for further proceedings.
1. Background.[4]
This appeal stems from an administrative enforcement proceeding brought by the Secretary against Robinhood, alleging that Robinhood violated MUSA by, inter alia, engaging in "unethical or dishonest conduct or practices in the securities, commodities[,] or insurance business," G. L. c. 110A, § 204 (a) (2) (G). In particular, the Secretary alleged that Robinhood provided investment recommendations[5] to its Internet-based[6] customers without considering whether those recommendations were in each customer's best interest; this conduct, the Secretary contends, violated Robinhood's fiduciary duties of care and loyalty under the fiduciary duty rule. Robinhood denies the allegations, maintaining that, as a "self directed" brokerage firm, it does not make investment recommendations or provide investment advice.[7]
After the Secretary initiated the administrative proceeding, Robinhood brought the instant action challenging the validity of the fiduciary duty rule.[8] On the parties' cross motions for judgment on the pleadings, see Mass. R. Civ. P. 12 (c), 365 Mass. 754 (1974), a Superior Court judge determined that the Secretary acted ultra vires,[9] exceeding his authority in promulgating the rule. The Secretary appealed, and we allowed Robinhood's unopposed application for direct appellate review.
2. Regulatory framework.
A brief review of the regulatory framework for investment service providers grounds our analysis of Robinhood's legal arguments, which are rooted in the traditional differences between the investment services provided by broker-dealers and investment advisers, as well as the different standards of care that consequently have been applicable to each.
Historically, broker-dealers have offered services to facilitate and execute securities transactions chosen by their customers, earning commissions on these trades.[10] At most, they have provided, free of any additional fee, investment advice that was solely incidental to the effected transactions.[11]
By contrast, investment advisers traditionally have provided ongoing investment advice, often taking the responsibility of continuous account management.[12] Rather than charging a commission for each transaction, investment advisers usually charged a periodic fee calculated as a percentage of a customer's assets under management.
As a result of the different investment services offered by each, Federal and State law historically have held broker-dealers and investment advisers to different standards of care. Investment advisers, because of their trusted advisory role, generally must comply with the full complement of fiduciary duties of "utmost good faith, and full and fair disclosure of all material facts," and shoulder an "affirmative obligation to 'employ reasonable care to avoid misleading'" clients (citations omitted). Securities & Exch. Comm'n v. Capital Gains Research Bur., Inc., 375 U.S. 180, 194 (1963). See Investment Advisers Act of 1940, 15 U.S.C. § 80b-6 (Investment Advisers Act).
Broker-dealers, because of their more limited role, have been subject to traditional agency principles when executing customers' transactions. See, e.g., Hill v. Bache Halsey Stuart Shields Inc., 790 F.2d 817, 824 (10th Cir. 1986) (broker, as customer's agent, generally owed fiduciary duties, but scope of duties turned on nature of broker's responsibilities because agent is only fiduciary within scope of agency). In addition, where a broker-dealer made a recommendation incidental to effecting a transaction, a broker-dealer must "have [had] a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the [broker-dealer] to ascertain the customer's investment profile." Financial Industry Regulatory Authority, Inc. (FINRA), FINRA rule 2111(a), https://www.finra.org/rules-guidance/rulebooks/finra-rules/2111 [https://perma.cc/RCS4-4KKX] (suitability standard).[13] Over time, the once-clear dichotomy between the services offered by broker-dealers, on the one hand, and investment advisers, on the other, has "blurred." XY Planning Network, LLC v. United States Sec. & Exch. Comm'n, 963 F.3d 244, 247 (2d Cir. 2020). Certain broker-dealers expanded the types of services and products they offered to retail customers, "often provid[ing] advice and mak[ing] recommendations about securities transactions and investment strategies." Id. at 248.[14] These broker-dealers also changed their marketing; "financial services firms began to use a variety of titles to describe their personnel, such as 'financial advis[er],' 'financial consultant,' and 'advis[er],'" Securities and Exchange Commission, Study on Investment Advisers and Broker-Dealers as Required by Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act 99 (Jan. 2011), https://www.sec.gov /news/studies/2011/913studyfinal.pdf [https://perma.cc/7THA- E22R] (Section 913 study, discussed infra).[15]
Additionally some broker-dealers' compensation models morphed. Rather than charging commissions, some broker-dealers draw revenue from "payments for order flow" -- "a method of transferring some of the trading profits from market making to the brokers that route customer orders to specialists for execution," Securities &Exchange Commission, Special Study: Payment for Order Flow and Internalization in the Options Markets (Dec. 2020), https://www.sec.gov/news/studies/ordpay.htm [https://perma.cc/PE6G-TS7G].[16] Under this compensation model, a broker-dealer's revenues are tied to the number of trades its customers execute, arguably providing an incentive to prefer third parties with the best rebate for the broker-dealer, see Gilman v. BHC Sec., Inc., 104 F.3d 1418, 1423-1424 (2d Cir. 1997), over those with the best...
To continue reading
Request your trial