Robinhood, securities regulators face off over Massachusetts fiduciary rule

Reuters

Published May 03, 2023 06:18AM ET

Updated May 03, 2023 01:21PM ET

By Chris Prentice

(Reuters) -Massachusetts' highest court on Wednesday heard arguments on whether to revive a state fiduciary duty rule that was central to an enforcement action securities regulators filed against the online brokerage Robinhood.

Lawyers for a Robinhood Markets Inc (NASDAQ:HOOD) subsidiary and Massachusetts Secretary of State Bill Galvin argued before the state's Supreme Judicial Court over the legality of a 2020 state regulation, which Robinhood has said oversteps Galvin's authority.

Last year, a Superior Court judge sided with Robinhood in a lawsuit the firm filed after Galvin in December 2020 accused it of encouraging inexperienced investors to place risky trades. He argued that Robinhood violated the rule he adopted that raised the investment-advice standard for brokers and that its broker-dealer license in the state should be revoked.

The judge's decision to invalidate the rule knocked out a main part of the case against Robinhood, which is on hold pending the outcome of Galvin's appeal.

Galvin's regulation overstepped existing laws when it imposed a standard that brokers avoid or mitigate conflicts of interest when giving investment advice, according to a lawyer for Robinhood.

Massachusetts law "does not give the Secretary the power to make conduct that is ethical under existing federal and state law unethical simply by announcing it to be so," Amy Saharia said in court on Wednesday.

But a lawyer for the Secretary of State disagreed and said the regulation is also consistent with the investor protections aims of federal law.

Galvin has said Robinhood had a duty to protect its customers and their money, but instead gave its inexperienced customers the ability to make an unlimited number of trades without first screening them.