SJC to Determine Fate of Secretary's Fiduciary Duty Rule
06/21/2023The Massachusetts Supreme Judicial Court (“SJC”) recently heard oral arguments concerning whether Secretary of State, William F. Galvin (the “Secretary”), exceeded his authority when he created the so-called Fiduciary Duty Rule, codified at 950 C.M.R. § 12.207(1)(a). The Fiduciary Duty Rule raises the investment-advice standard for broker-dealers to the heightened fiduciary standards applied to investment advisors. The Fiduciary Duty Rule makes it “unethical or dishonest” under the Massachusetts Uniform Securities Act (“MUSA”), for a broker-dealer to “fail … to act in accordance with a fiduciary duty to a customer when providing investment advice or recommending an investment strategy, the opening of or transferring of assets to any type of account, or the purchase, sale, or exchange of any security.”
The Fiduciary Duty Rule has widespread implications for broker-dealers. The case at issue is Robinhood Financial, LLC v. Galvin. Robinhood is an online brokerage that offers commission-free trading for stocks and options to its customers. In December 2020, the Secretary administratively revoked Robinhood’s state trading license for alleged violations of the Fiduciary Duty Rule. Robinhood took the case to court where the Superior Court invalidated the Fiduciary Duty Rule. The Secretary appealed the Superior Court’s decision to the SJC.
Robinhood contends that the Secretary created the Fiduciary Duty Rule by “administrative fiat” and exceeded his authority under MUSA. Robinhood claims that the Secretary’s actions were in contravention of federal and state securities laws – and rulings by the SJC – that permit broker-dealers to give recommendations to clients without being subject to heightened fiduciary duties, as long as the broker-dealer is not being compensated as an investment advisor.
The Secretary argues the Fiduciary Duty Rule is proper under the authority vested in him pursuant to MUSA, which allows the Secretary to “defin[e] any terms,” including the term “unethical or dishonest conduct or practice,” as found in Section 204. The Secretary further asserts that the Fiduciary Duty Rule is designed to protect inexperienced investors, in an ever-changing trading market, from unethical conduct by broker-dealers. The Secretary reasons that if broker-dealers provide investment advice or recommendations, the investor is entitled to advice made in their best interest and without conflict.
Take Away:
- A ruling from the SJC as to the fate of the Fiduciary Duty Rule is expected this summer. The SJC’s decision will have widespread implications for broker-dealers in Massachusetts, as well as the general investing public.
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