Robinhood Financial, LLC is asking a Massachusetts Superior Court to enjoin the Massachusetts Securities Division from enforcing its newly promulgated broker-dealer fiduciary duty rule. The rule was effective March 1 of last year, and the Division stated it would commence enforcement on September 1. 950 Code of Massachusetts Regulations § 12.207; see Massachusetts Adopts a Fiduciary Duty Rule—First Piece in a Patchwork Quilt of State Regulation, or Soon to be Declared POA (Preempted on Arrival)?, https://www.potomaclaw.com/news-news-massachusetts-adopts-a-fiduciary-duty-rule (3/11/20); Massachusetts Securities Division Issues Fiduciary Conduct Rule FAQ’s, https://www.potomaclaw.com/news-Massachussetts-Securities-Division-Issues-Fiduciary-Conduct-Rule-FAQs (5/12/20).
A December 16, 2020, administrative complaint against Robinhood was the Division’s first (and so far only) publicly-announced action seeking to enforce the rule. That complaint garnered considerable attention at the time, not only for being the Division’s first foray into enforcing the rule but also for taking issue with Robinhood’s alleged “gamification” of investing and facilitation of trading by young and less experienced investors. Robinhood is a commission-free online trading platform with a stated “mission to democratize finance for all.”
On April 15 Robinhood filed with the Massachusetts Superior Court’s Business Litigation Session a Complaint for Injunctive and Declaratory Relief along with a Motion for Preliminary Injunctive Relief. Robinhood Financial LLC v. Galvin, No. 21-CV-00884. The complaint alleges the Division’s fiduciary duty rule is preempted by federal law, in particular the Securities and Exchange Commission’s Regulation Best Interest (“Reg BI”). Robinhood’s preliminary injunction brief notes that “obstruction of federal policy is the stated purpose of the new rule, as well as its effect.” In addition, Robinhood asserts that the fiduciary duty rule is invalid under Massachusetts law--because the Supreme Judicial Court has long held that, except in certain specific circumstances, a broker-dealer does not have a fiduciary obligation to a client, and the Division lacks authority to abrogate that principle--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 to its customers. In addition to seeking declaratory relief to that effect, the complaint asserts a claim under 42 U.S.C. § 1983 for the Division’s alleged violation of the Supremacy Clause of the United States Constitution. The complaint seeks a stay of the Division’s administrative enforcement action against Robinhood and an injunction enjoining enforcement of the fiduciary duty rule. Given the multiple legal grounds asserted, it is possible the court could issue the requested stay and injunction without deciding the preemption issue.
Not to be outdone, on the same day Robinhood filed its Superior Court complaint and preliminary injunction motion, the Securities Division sought leave to amend its administrative complaint, to add, along with some new factual allegations concerning certain events since December, a request to revoke Robinhood’s registration as a broker-dealer in Massachusetts. In the Matter of Robinhood Financial, LLC, Securities Division Docket No. E-2020-0047.
A statement released by Robinhood includes the following: “We will stand with our customers to enable them to have the investing experience they want. We will not succumb to unfounded, politicized allegations and unreasonable demands from the Massachusetts Securities Division.”
A Superior Court hearing on Robinhood’s request for a preliminary injunction is scheduled for May 11.