Page 34 - Investment Advisor - November 2023

an important recognition by a state to move toward a bona fide fiduciary states that impose obligations, like the
Supreme Court that state regulators standard,“ according to Rhoades. Massachusetts Fiduciary Rule, that
have an important role to play in a The most important aspect of the extend beyond Regulation BI’s obliga-
federal system to level up regulatory Massachusetts decision, according to tions,” the alert said.
obligations and duties when it seems Rhoades, “is that states are not preempt- “Particular attention will be required
like the federal government is not ed from adopting fiduciary standards by to assess what sorts of communications
doing enough.” federal securities laws,“ nor by the SEC’s by broker-dealers regarding investment
The ruling, according to Tierney, adoption of Reg BI. opportunities to retail investors can be
a former SEC attorney, is also While the Massachusetts decision construed as investment recommenda-
“somewhat of a recognition that “is not binding upon other state courts, tions or advice subject to heightened
Reg BI, for all its benefits, has a nor on the federal courts, its precedent state-level standards,” the firm wrote.
lot of warts both in its design and may well give impetus to at least a few For example, in Robinhood’s case,
implementation.” other states to adopt fiduciary stan- Galvin “claimed Robinhood had encour-

The ruling in Massachusetts “is an important recognition by a state

Supreme Court that state regulators have an important role to play

in a federal system to level up regulatory obligations and duties
when it seems like the federal government is not doing enough.”

—James Tierney

The court’s decision “is instrumental- dards for broker-dealers when provid- aged frequent, risky, and unsuitable
ly useful for advocates of stronger fidu- ing investment advice to retail clients,“ trading by retail investors, published
ciary protections in investment advice to Rhoades explained. investment categories like ‘100 Most
make that case,” Tierney said. An alert from the law firm Popular’ or ‘Top Movers,’ implemented
Indeed, Ron Rhoades, associate pro- Ropes & Gray concurred that the strategies to incentivize customer
fessor of finance at Western Kentucky Massachusetts ruling “leaves the door engagement with its trading platform,
University and director of its personal open for other state regulators to set and that each of these practices was
financial planning program, said in a more demanding standards applicable to tantamount to making investment
recent email that Reg BI “does not broker-dealers operating in their states,“ recommendations to customers,” the
impose a fiduciary duty of loyalty” but and “raises a substantial threat of the alert said.
“a new ‘best interest’ obligation that very ‘patchwork of inconsistent state- Robinhood’s defenses to these argu-
is still in the process of being defined level standards’“ of which former SEC ments, the firm wrote, “have yet to be
and applied.” Chairman Jay Clayton warned. addressed by the trial court or in the
With a new DOL fiduciary rule on Further litigation in other state or Secretary’s administrative proceed-
the horizon, he said, “the fiduciary bat- federal jurisdictions may seek to chal- ings — as the litigation to date has focused
tlegrounds will continue to be active lenge this reasoning. on the legality of the Massachusetts
spheres where pro-fiduciary advocates Fiduciary Rule itself, not its application
will be pitted against firms whose eco- Internet AdvICe to Robinhood’s business.”
nomic models are threatened by the The Ropes & Gray alert also warns that A spokesperson for Galvin’s office
fiduciary standard.” the Massachusetts ruling also applies told me that regarding the administra-
to investment recommendations or tive case against Robinhood, “the parties
FIdUCIArY BAttLeGroUnd advice provided from outside the state have asked to schedule a status confer-
The Massachusetts Supreme Judicial via the internet. ence, and that decision is still pending
Court decision “adds additional traction For national broker-dealers, including before the hearing officer.”
to the ongoing movement in the market- those operating internet platforms, the
place, aided by fiduciary advocates and decision “further complicates compli- Washington Bureau Chief Melanie Waddell
federal and state securities regulators, ance and increases associated costs in can be reached at [email protected].

32 Investment AdvIsor November 2023 | ThinkAdvisor.com