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FMG Law Blog Line

Robinhood v. The Commonwealth

Posted on: April 20th, 2021

By: Kirsten Patzer

Even before Robinhood made headlines with the GameStop debacle earlier this year, the Massachusetts Securities Division and Secretary of the Commonwealth, William Galvin, had Robinhood in their sight. On December 16, 2020 the Massachusetts regulators brought their first action under the recently implemented fiduciary rule standard, alleging Robinhood aggressively targeted young people with little to no investment experience, failed to follow its own supervisory policies and procedures, and used gamification strategies to encourage frequent trading on their platform breaching the fiduciary conduct standard under Massachusetts law.        

Now Robinhood is fighting back.

Last week, in response to Secretary Galvin amending the original administrative complaint calling for the revocation of Robinhood’s brokerage license with the Commonwealth, Robinhood filed a Complaint for Injunctive and Declaratory Relief. The Complaint, filed in the Business Litigation Session of Suffolk Superior Court, is not just claiming Robinhood did not breach the new fiduciary standard, they are challenging the rule itself as invalid under both Massachusetts and federal law.

Robinhood argues the new rule is invalid because it contradicts the Massachusetts’ Supreme Judicial Court’s prior rulings that, as a matter of law, brokerage firms are not fiduciaries of their customers and the Massachusetts Constitution specifically prohibits the Secretary from usurping the authority of the judiciary or creating or amending laws passed by the legislature.

Robinhood also attacks the underlying administrative proceeding as “futile”, noting the presiding officer over the action is a “senior attorney in the Division who: has worked for the Secretary for decades; was instrumental in enacting the very regulation that Robinhood is challenging; and participated in the Division’s investigation of Robinhood.” And, even if the administrative officer were to find in Robinhood’s favor, the Securities Division’s director can overturn their decision.

Additionally, by implementing the fiduciary standard, Robinhood alleges the Division and Secretary have violated the Supremacy Clause of the United States Constitution, as the new rule directly conflicts with the new Regulation Best Interest standard promulgated by the SEC in June 2020, the Dodd-Frank Act, and the Commerce Clause.

While Massachusetts is the first to implement a higher fiduciary standard for broker-dealers operating in their jurisdiction, other states, like Nevada and New Jersey, are well on their way to adopting the stricter standard. This action could change the regulatory landscape governing the securities industry as the courts now have to tackle, head on, the question of whether states can create their own set of standards.

For more information, please contact Kirsten Patzer at [email protected].

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