Judge Declines to Enjoin Mass. Securities Division Proceeding Charging Violation of the Division’s New Fiduciary Duty Rule

A Massachusetts Superior Court judge on Thursday declined the request of Robinhood Financial that he enjoin a Massachusetts Securities Division administrative enforcement proceeding seeking to bar Robinhood from doing business in Massachusetts for, inter alia, violating the Division’s new fiduciary duty rule.  Issuing his ruling promptly after a virtual hearing on Robinhood’s motion on Wednesday, Judge Kenneth Salinger, sitting in the Business Litigation Session, found that Robinhood failed to establish the irreparable harm requisite to issuance of a preliminary injunction.  Judge Salinger did not, however, close the door on Robinhood’s challenge to the rule--for the time being he declined to stay the action in his court to await conclusion of the Securities Division proceeding.  He invited briefing from Robinhood and the Division on whether he should stay the court action.

In a complaint and in motion for preliminary injunction papers filed on April 15 Robinhood alleges the Division’s fiduciary duty rule promulgated last year is preempted by federal law, in particular the Securities and Exchange Commission’s 2020 Regulation Best Interest (“Reg BI”).  In addition, Robinhood alleges the fiduciary duty rule is invalid as an unauthorized exercise of power by the Division, that the rule violates Robinhood’s First Amendment free speech rights and the “Dormant Commerce Clause,” and that the rule by its terms cannot validly be applied to Robinhood because it is a “self-directed” brokerage firm that does not make investment recommendations or provide investment advice.  See “It Was Only a Matter of Time—Robinhood Challenges Massachusetts Securities Division’s Broker-Dealer Fiduciary Duty Rule,” https://www.potomaclaw.com/news-Robinhood-Challenges-Massachusetts-Securities-Division-Broker-Dealer-Fiduciary-Duty-Rule (April 20, 2021).

The court found Robinhood would not be irreparably harmed by permitting the administrative proceeding to continue because the Division alleges violations in addition to the alleged violation of the fiduciary duty rule, namely that Robinhood’s conduct also was unethical or dishonest and that it failed adequately to supervise its employees.  The incremental burden of also defending against the fiduciary duty rule violation does not constitute irreparable harm, the court held.  The court noted that Robinhood had not cited any case in which a court enjoined a pending administrative proceeding until a legal question was resolved by the court.  Judge Salinger further found that it would not be in the public interest to enjoin the Division proceeding.

Having found no irreparable harm to Robinhood if the Division proceeding continues, the court saw “no need for the Court to determine whether Robinhood is likely to succeed on the merits of its constitutional claims.”

Robinhood’s court action remains alive because Judge Salinger determined that “Robinhood is likely to succeed in showing that it should not have to exhaust its administrative remedies in the pending enforcement action before seeking and obtaining declaratory relief on whether the fiduciary duty regulation is lawful.”  In support of this conclusion the judge found that asking the Division to vacate the rule would be futile, Robinhood’s challenges to the rule turn on pure questions of law not requiring any fact-finding, and the challenge is of great public significance, affecting many broker-dealers beyond Robinhood, and those firms’ many clients.

Acknowledging that “it would be unusual to stay a civil action to wait for resolution of an administrative adjudicatory proceeding if the court determines that the plaintiff is not required to exhaust their administrative remedies,” the court nevertheless noted that “there is some logic to staying this action until the Securities Division can complete its proceeding and decide these questions,” because there are possible outcomes in the administrative proceeding that could moot the challenge to the rule in court.  The court gave the parties until June 10 to file short briefs addressing “whether the court should or should not stay this action until there is a final decision in [the] pending administrative proceeding, and what case schedule would be appropriate if this matter is not stayed” for presenting and deciding a dispositive motion on the merits of Robinhood’s constitutional claims.  And the court scheduled a scheduling conference for June 14.