A Massachusetts judge on Thursday gave state securities regulators a green light to proceed with their case against Robinhood Financial LLC, ruling that it wouldn’t be in the public interest to block an administrative hearing on allegations that the online brokerage doesn’t protect inexperienced investors.
Robinhood, the zero-commission trading platform that has exploded in popularity this year, asked a court last month to issue a preliminary injunction to prevent an administrative complaint brought by the Massachusetts Securities Division from proceeding. In its request, Robinhood argued that the state’s new fiduciary rule—which state regulators have accused Robinhood of violating—should be invalidated.
In his ruling, Suffolk County Superior Court Judge
Kenneth W. Salinger
didn’t rule on the validity of the state’s fiduciary rule, which requires brokers to act in their clients’ best interest. Instead, he indicated Robinhood could continue to challenge the rule in court.
Robinhood has argued that the fiduciary rule doesn’t apply to the company, in part, because it is a self-directed brokerage that doesn’t make investment recommendations or provide advice. The brokerage has also argued that the rule is in conflict with other regulations and determinations, and that the state’s top securities regulator, Secretary of the Commonwealth
is unable to “redefine the common law of broker-dealers.” The fiduciary rule was supported by Mr. Galvin and took effect last year.
In the decision, Judge Salinger requested further information from both parties about whether Robinhood’s challenge to the fiduciary rule should move forward, or whether it should be paused pending the outcome of state regulators’ administrative complaint.
Mr. Galvin’s office in December filed a complaint against Robinhood, alleging the company aggressively marketed to inexperienced investors and failed to implement controls to protect them. His office in April also asked that the company’s registration as a broker-dealer in the state be revoked to prevent Robinhood from doing business there. Mr. Galvin’s allegations were filed as an administrative complaint instead of in court, meaning that the case will be handled by a hearing officer.
In allowing securities regulators’ administrative complaint to go forward, Judge Salinger noted that state securities regulators’ complaint against Robinhood included allegations of violations outside the fiduciary rule, and that it would “not be in the public interest” to enjoin prosecution of the other claims.
a spokeswoman for Mr. Galvin, said in an email he was “pleased with this victory.”
Robinhood declined to comment. The online brokerage has previously disputed state regulators’ allegations, countering that it has opened the door to investing to millions of people. Robinhood had about 20 million users at the end of 2020, the Journal previously reported.
A decision regarding Massachusetts’ fiduciary rule could have broad implications for the brokerage industry. In an amicus brief filed this month, the Securities Industry and Financial Markets Association, a trade association, argued that allowing it to stand could reduce the ability for broker-dealers to “predictability operate” in the state, adding that companies will likely provide less information to investors on their platforms, fearing that “providing such information will subject them” to the fiduciary rule.
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Appeared in the May 28, 2021, print edition as ‘Judge Allows Massachusetts to Pursue Robinhood Case.’