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Oct 23, 2023 | Blog, Litigation

Massachusetts Fiduciary Duty Rule Applies to Both Investment Advisors and Broker-Dealers

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The Massachusetts Supreme Judicial Court (SJC) has extended the state’s fiduciary duty rule that applies to investment advisors to also cover broker-dealers that operate within the Commonwealth of Massachusetts.

In Robinhood Financial LLC vs. Secretary of the Commonwealth, the state’s highest court ruled that the same duties of care and loyalty that are required of investment advisors also apply to broker-dealers.

The Secretary of the Commonwealth of Massachusetts initiated an administrative proceeding against Robinhood Financial LLC (“Robinhood”) in which the Secretary alleged that Robinhood, by its actions had violated the Massachusetts Uniform Securities Act. (“MUSA”) Specifically, the Secretary asserted that Robinhood was providing investment recommendations to its internet-based customers without making a determination as to whether or not those recommendations were in the best interest of the customer which the Secretary alleged violated Robinhood’s fiduciary duties of care and loyalty under the state’s fiduciary duty rule. (The administrative complaint filed by the Secretary further alleged that Robinhood targeted younger investors with little or no investment experience; inadequate infrastructure; which led to repeated outages and disruptions on its trading platform and failed to follow its own written supervisory procedures).

After a Massachusetts Superior Court ruled that the Secretary had exceeded his authority in applying the rule, the SJC granted an application for direct appellate review.

The SJC Ruling

The SJC ruled that the Secretary of the Commonwealth had the authority to apply the fiduciary duty rule to broker-dealers under MUSA because the Secretary has the discretion to establish regulations which are necessary and appropriate in the public interest and for the protection of investors which are consistent with the objectives of the MUSA. The Court stated that one of the considerations made by the Secretary before uniformly applying the fiduciary duty rule was that many investors did not understand the different standards of care required of investment advisors and broker-dealers which led to confusion especially considering the changes in the securities industry which have led to broker-dealers expanding their offerings beyond the traditional. As a result, the SJC found that the Secretary’s decision was consistent with his obligation to protect against unethical or dishonest conduct or practices.

Implications of the Ruling

For investors, the Robinhood decision provides that broker-dealers have the same fiduciary duty to customers as do investment advisors. For broker-dealers operating within the Commonwealth of Massachusetts, they are now required to adhere to a higher standard of care than those imposed by the Securities and Exchange Commission (SEC).

The litigation attorneys at Wilchins Cosentino & Novins LLP are ready, willing and able to assist with financial services litigation matters and have a proven track record of successfully prosecuting cases representing securities and investment firms, financial advisors and investors, including individuals and institutions throughout the country.

Learn more about our Financial Services Litigation practice.

To discuss this article or a financial services litigation matter, please contact Michael B. Cosentino by phone at 781-235-5500 or 781-247-8013 or by email at mcosentino@wcnllp.com.

This article is not legal advice and should not be taken as such or relied upon as legal advice. 

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