A court dispute between retail brokerage Robinhood Markets and Massachusetts' top securities official is testing just how far states can go beyond federal standards in tightening their oversight of broker-dealers.
The latest salvos in the Robinhood case came on April 12 with the filing of briefs over whether Massachusetts was within its rights to impose its own fiduciary rule on the brokerage industry. That standard, adopted in February 2020, is generally considered stricter than the Securities and Exchange Commission's Regulation Best Interest, which governs broker-dealers in other states.
"And that's a good thing, since the SEC's Regulation Best Interest is a weak remedy for adviser conflicts of interest, one that has not lived up to the letter or spirit of Dodd-Frank or the federal securities laws," Better Markets stated in a release announcing the filing of its brief. "That makes regulation like the Massachusetts fiduciary duty rule, which can fill gaps in the federal rule, all the more important."
Robinhood
The fiduciary rule is held up in the wealth management industry as the gold standard for advisor conduct. It calls on financial planners to always put their clients' interests first and to eliminate all but the most unavoidable conflicts of interest.
But it only applies to registered investment advisors and similar professionals who tend to make money by charging flat fees.
Brokers who charge commissions instead fall under Regulation Best Interest, or Reg BI as it's known for short. Adopted in June 2019, Reg BI places its emphasis on disclosing conflicts of interest rather than trying to avoid them all together.
Massachusetts Secretary of the Commonwealth William Galvin thought that didn't go far enough to protect investors in his state. In adopting a state-level fiduciary standard for broker-dealers,
Galvin
He also accused Robinhood of not taking care to make sure investment options it was presenting to customers could reasonably be considered in their best interest. Galvin said he wasn't buying Robinhood's argument that it was only presenting options rather than making actual recommendations.
"This is no different from a broker-dealer agent handing a list of securities to a customer, pretending to be surprised when the customer purchases securities from that list, and then proclaiming that he made no recommendations to that customer," Galvin argued in the brief. "Robinhood gave hundreds of customers with little or no investment experience the ability to make thousands of trades in a matter of months."
Unfortunately for Galvin, Reg BI was also the law of the land when he brought his suit against Robinhood. Robinhood made that point in the
In a
Steve Hall, the legal director and securities specialist for Better Markets, said there are plenty of areas of regulation in which states are allowed to impose stricter standards than the federal government.
"Labor law, workplace safety and minimum wages all leap to mind," he said. "This is not a matter of imposing a weaker standard. Reg BI is weak on its face, and it has proven weak in effect, and it needs to be bolstered."
Both Better Markets and the Institute for the Fiduciary Standard, a longtime critic of Reg BI, noted in their
Knut Rostad, the president of the Institute for the Fiduciary Standard, said it's hard to predict what a defeat for Massachusetts in this case would mean for other states' attempts to hold brokerages to stricter standards. Security laws vary too much to generalize, he said. But he thinks a victory would encourage more state officials to consider following Massachusetts' example.
"Other states would be more welcoming to the idea of having their own fiduciary rule," Rostad said.
