In September, Massachusetts strengthened its investment advice standard for brokers. Now, the state is taking on its first major case to test its new fiduciary rule.
On Wednesday, Secretary of the Commonwealth William Galvin charged Robinhood with violating the Massachusetts fiduciary rule, which dictates that brokers must make financial recommendations without regard to their own financial interests.
The action was brought against Robinhood for violations of Massachusetts law in connection with the rapidly growing online trading platform’s, “1) aggressive tactics to attract new, often inexperienced, investors; 2) failure to implement policies and procedures reasonably designed to prevent and respond to outages and disruptions on its trading platform; 3) use of strategies such as gamification to encourage and entice continuous and receptive use of its trading applications; 4) failure to follow its own written supervisory procedures regarding the approval of options trading; and 5) breach of the fiduciary conduct standard required by the Act and Regulations," states the order.
“These actions do not represent the behavior of a fiduciary and are inconsistent with the duty Robinhood owes Massachusetts investors,” explains the order. “By instituting this proceeding, the Enforcement Section charges Robinhood with … falling far short of the fiduciary standard required of a broker-dealer registered in Massachusetts.”
The case, however, already has many questioning the likelihood of a favorable verdict, and has surprised many as it’s a difficult first battle for the new regulations.
Massachusetts is just one of many states that has chosen to advance their fiduciary regulations in the light of the SEC’s new brokers standard, Reg BI, which they see as being too weak to stop broker conflicts. A ruling on the Massachusetts vs Robinhood case could lead to an eventual battle where a higher court decides if states rules or Reg BI should govern brokers.
On Thursday, the SEC took action against Robinhood as well, announcing a $65 million settlement over charges that the company failed to give customers the best prices on their trades.
