Massachusetts Secretary of State Galvin, who supervises the State Securities Division that in turn oversees investment markets and professionals, long has been diligent in pushing the limits of his power to protect the retail investor. In March of 2020, his office promulgated a rule holding stock brokers who make recommendations to customers to a “fiduciary” standard, which is the highest legal obligation that one can hold.
Along comes Robinhood Financial, the no-charge brokerage platform about as controversial as a brokerage can be. Think the run-up of GameStock shares. Robinhood brought suit against the Secretary of State, claiming that a brokerage does not have an almost absolute liability, in recommending a stock, at least as far as a duty to investigate the stock in detail and apply a high standard of taking actions with the constant intent to protect the investor. This is the kind of duty that your investment advisor owes you– not to be always right, but to take very great pains to try to be right.
There is no doubt a continuum of duties here, and the line may be hard to find, but it matters what the legal standard says. And, Robinhood just won its case, as the Suffolk Superior Court held that it was not within the power of the Secretary of State to require that brokers be held to the same standard applied to investment advisors.
Beyond our scope is a discussion of Federal regulation which has grappled with defining these standards; the Massachusetts case turned on the fact that Massachusetts common law (court decisions) never had held that brokers were fiduciaries and that Galvin had no authority to set a different rule. Galvin was given thirty days to appeal.
Massachsuetts always has been rigorous in overseeing the securities industry. I recall decades ago an upstart company was doing an IPO, I was a user of its product and wanted to invest, and Massachusetts wouldn’t allow Mass brokers to handle the stock. I had to call my father in New York to buy me a hundred shares. Pretty embarrassing as I was already practicing law at the time. Of course I was and am glad I persevered; turns out that Apple was in fact a pretty good investment…..