We all remember the legend of Robin Hood, who with his band of Merrie Men (plus Maid Marian of course) materialized from the depths of medieval Sherwood Forest to torment the corrupt Prince John and the cruel Sheriff of Nottingham, while good King Richard the Lion Heart was away on the Crusades. Robin Hood’s mission was to challenge the Establishment with light-hearted menaces and non-lethal violence (according to the movies) by seizing the upper class’s unearned riches and redistributing them to the deserving poor.
Ten years ago a new Robinhood emerged, not from a dark forest but from the bright sunshine of Silicon Valley, in the form of a revolutionary broker dealer who offered an on-line securities trading platform designed to attract under-served millennials and to encourage active trading (including cryptocurrencies) by not charging commissions on the trades. Highly successful—Robinhood went public in 2021—the new brokerage firm attracted hordes of millennials to its trading platform and thus, as in days of yore, challenged the Establishment—in this case the traditional commission-oriented broker dealers. But by so doing the new Robinhood, as with its namesake, incurred the wrath of the law. However, this time its adversary was not a lowly sheriff but rather the formidable Commonwealth of Massachusetts.
Robinhood Financial LLC v. Secretary of the Commonwealth (decided August 25, 2023) began not with arrows shot by green men from behind trees, but with an administrative enforcement proceeding by the Secretary of the Securities Division of the Commonwealth, who accused Robinhood of violating a March 2020 rule of the Commonwealth’s Securities Division that imposes a fiduciary duty upon brokerage firms who provide investment advice. The Secretary asserted that Robinhood encouraged “frequent, risky, and unsuitable trading” by inexperienced investors [writer’s note—Robinhood’s targeted market--millennials] by publishing investment categories like “100 Most Popular” and “Top Movers”.
In response, Robinhood filed suit in Massachusetts state court challenging the fiduciary rule, claiming the rule exceeded the statutory authority under which it was promulgated. Robinhood won the first skirmish: the Superior Court held that the Secretary’s fiduciary duty rule was invalid.
However, the Secretary appealed and the appellate court reversed, holding that the legislature of the Commonwealth’s broad-ranging grant of authority permitted the Secretary to pass the fiduciary duty rule. The appellate court also rejected Robin Hood’s argument that the fiduciary rule was preempted by the Security and Exchange Commission’s Regulation Best Interest (Reg. BI”). Reg BI imposes a ‘best interest’ standard upon brokerage firms who provide investment advice, and this standard is lower than a fiduciary one although by how much is unclear. Robinhood relied upon the doctrine of “conflict preemption” to assert that the fiduciary rule frustrated the purpose of Reg. BI, which was to establish a uniform nationwide standard for securities firms, and argued that it would be economically unfeasible for brokerage firms operating in Massachusetts to be subject to a higher standard than under Reg. BI.
In rejecting Robinhood’s position, the court found that that Reg BI established only a “floor” and not a “ceiling” to the standard of care that can be imposed upon brokers by state regulatory agencies, and was untroubled by the dilemma posited by Robinhood.
The upshot of Robinhood Financial LLC v. Secretary of the Commonwealth is that securities firms are subject to Reg. BI uniformly but their business in Massachusetts (and any other fiduciary duty states) is subject to the higher fiduciary standard. Since it would be difficult if not impossible for a securities firm to operate in some states under a fiduciary standard and nationally under the best interest one, the imposition of a fiduciary standard by Massachusetts may have the practical effect of establishing a nationwide fiduciary standard—something that the SEC declined to do.
So…(a) absent further court proceedings in Massachusetts reversing the Commonwealth decision; (b) unless Congress enacts legislation preempting states from imposing higher standards upon broker dealers than those imposed by the SEC (unlikely), or (c) unless Errol Flynn comes to the rescue (extremely unlikely), the Merrie Men who founded Robinhood will not be able to fade into the woods, and not only they, but indeed the entire broker dealer industry may be constrained to offer their advisory services nationally under a fiduciary standard.
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