In its August 2023 decision, Robinhood Financial LLC v. Galvin, the Massachusetts Supreme Judicial validated the Secretary of the Commonwealth of Massachusetts’ 2020 regulation to mandate a fiduciary duty standard of care for Massachusetts broker-dealers when they provide investment advice to Massachusetts retail investors. This decision continues the pattern in Massachusetts of holding broker-dealers to higher standards, and will have the effect of requiring changes in the industry itself.

Background

Traditionally, there were marked differences in the standard of care required of Massachusetts broker-dealers and investment advisors. Broker-dealers offered services to facilitate and execute securities transactions chosen by the customer, on which they earned a fee. They provided investment advice solely incidental to the transaction. Primarily, they were “regulated” by certain “suitability” obligations and agency principles. Under Patsos v. First Albany Corp., 433 Mass 323 (2001), only if a plaintiff could establish a “unique” or “special” relationship with the broker-dealer within the scope of an agency relationship, could a broker-dealer be held to the heightened fiduciary duty standard. By contrast, investment advisors provided investment advice and received a commission based upon a percentage of assets under management. As such, historically, investment advisors had been held to the fiduciary duty standard.

Attorney Charles M. Waters

In 2018, and in the context of the Dodd-Frank Act, the United States Congress investigated the increasing “blurred lines” in retail investing between the financial services provided by broker-dealers, on the one hand, and investment advisors, on the other. This perceived confusion led to studies, reports, and recommendations to the Security Exchange Commission that identified problems in the manner in which broker-dealers began describing themselves using terms like “financial advisers” and “financial consultants,” marketing themselves as providing quasi-fiduciary services, and paying themselves in a manner that appeared similar if not identical to investment advisors. Of course, Congress’ concern was to protect innocent and/or inexperienced investors who would not know the difference between the two roles, and would not recognize that the broker-dealers did not have fiduciary obligations. Ultimately, the SEC attempted to address this consumer confusion by implementing rules called the Regulation Best Interest Rule (“best interest of retail customer”), but this stopped short of implementing a blanket fiduciary duty obligation regardless of the label of the financial service professional providing investment advice. There were critics of the new SEC standard, as the term “Best Interest” was never actually defined by the SEC, and the regulations contained some ambiguous phrasing.

The Secretary of the Commonwealth of Massachusetts (“Secretary”) was one of the critics. Pursuant to his authority under the Massachusetts Uniform Securities Act (G.L. c. 110A), he enacted regulations (950 Code Mass. Regs. § 12.207) requiring broker-dealers to adhere to a fiduciary duty standard of care (“Massachusetts Fiduciary Duty Rule”). With this new regulation, Massachusetts is now one of only a few states that hold broker-dealers to fiduciary duty standards when providing advice to retail investors.

**The Robinhood Decision**

In the Robinhood case, the Secretary appealed a trial court’s decision that the Massachusetts Fiduciary Duty Rule regulation exceeded the Secretary’s authority. The SJC reversed the trial court, and concluded:

The Massachusetts Fiduciary Duty Rule did not change common law (the Patsos case). Specifically, the SJC ruled that the Legislature may appropriately provide protection above and beyond the common law, and that a plaintiff could have claims for both.
The SEC’s Regulation Best Interest Rule did not preempt Massachusetts Fiduciary Duty Rule because the federal regulations did not indicate any intent to do so.
There was no “conflict preemption.” The SJC determined “that the Regulation Best Interest [Rule] constitutes a regulatory floor that does not foreclose State regulation to more clearly protect investors.”

Fallout

In what is seen by the financial industry as creating more disruption and by litigants as a significant victory for consumers and plaintiffs, the SJC’s validation of the Fiduciary Duty Rule will have long-lasting impacts. First, the industry will be forced to react. Specifically, broker-dealers that give advice to retail investors in Massachusetts will now have to simultaneously comply with both the Regulation Best Interest Rule and the Massachusetts Fiduciary Duty Rule, which have disparate definitions and obligations. Additionally, national broker-dealers conducting business in Massachusetts will need to review, update and integrate their internal compliance policies paying close attention to the newly-set obstacles. Finally, financial service firms will need to scrutinize what types of communications trigger “investment advice.” In the Robinhood case for example, the Secretary claimed that Robinhood’s identifying and publishing investment categories like “Top Movers” and “100 Most Popular” on its website constituted making investment recommendations.

Finally, from a litigation perspective, by elevating the standard of care required by broker-dealers, the Massachusetts Fiduciary Duty Rule will make establishing a breach of that standard more attainable with less evidence for those plaintiff investors who claim that they were given inadequate investment advice. Whereas before there were several hurdles, now there will exist broad arguments for plaintiffs that will focus on whether the broker-dealer delivered the “utmost care and loyalty” in all aspects of the transactions at issue.

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Charles M. Waters is a Shareholder at Sheehan Phinney Bass & Green where he chairs the firm’s Boston Litigation Group. Charles can be reached at [email protected] or 617.897.5644.

This article is intended to serve as a summary of the issues outlined herein. While it may include some general guidance, it is not intended as, nor is it a substitute for, legal advice.