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Massachusetts’ Fiduciary Rule Struck Down


The Bay State’s fiduciary rule encountered a major setback when a Massachusetts judge on March 30 invalidated the March 2020 rule that imposed a heightened fiduciary conduct standard on broker dealers and agents. 

The March 30 ruling by Suffolk County Superior Court Judge Michael Ricciuti held that Massachusetts Secretary of Commonwealth William Galvin lacked the authority to adopt the rule. “In consideration of the relevant facts, the parties’ memoranda of law and oral arguments, and for the reasons that follow, the Court concludes that on the first issue, the Secretary’s promulgation of the Fiduciary Duty Rule was beyond his authority,” Judge Ricciuti wrote. 

The case was brought by online brokerage Robinhood Financial, which was the subject of the state’s first enforcement action of the new fiduciary rule, in which Massachusetts charged the online trading platform with taking advantage of inexperienced investors.

Galvin had brought an administrative enforcement complaint against Robinhood in December 2020  contending, among other things, that the company engaged in “dishonest and unethical” business practices over what he argued were its “aggressive tactics” to attract inexperienced investors, its use of gamification strategies to “manipulate” customers, and its failure to prevent frequent outages and disruptions on its trading platform. 

Robinhood countersued in April 2021 to challenge the validity of the rule, claiming that:

  • it was invalid on its face and as it applied to the company; 
  • Galvin lacked the authority to adopt it; 
  • the rule unlawfully overrides Massachusetts common law; and 
  • it is preempted by the SEC’s Regulation Best Interest. 

Failure to Follow Precedent

Under the ruling, Judge Ricciuti held that the fiduciary rule failed to follow state court precedent and disregarded state law denying the secretary such enforcement discretion. “Because the Fiduciary Duty Rule imposes a fiduciary duty on broker-dealers even where they lack the type of relationship described in Patsos [the state court precedent] as triggering a fiduciary duty, it expands the universe of broker-dealers subject to fiduciary obligations beyond those subject to such duties under Patsos,” Judge Ricciuti wrote. “The Fiduciary Duty Rule thus changes the common law as defined by the Supreme Judicial Court in Patsos and provides grounds for the Secretary’s claims against Robinhood.” 

Moreover, the court noted that, at argument, the secretary was unable to cite a case holding that an executive agency could by regulation override the common law as defined by the Supreme Judicial Court. 

Furthermore, in noting that the Massachusetts Uniform Securities Act (MUSA) directed the secretary to maintain consistency in the securities law among with Massachusetts, the federal government and the other states which have adopted the Uniform Securities Act, the court held that the fiduciary duty rule runs directly contrary to this direction. “It overrides the common law, as interpreted in Patsos, which recognized “general agreement [within the law] that the scope of a stockbroker’s fiduciary duties in a particular case is a factual issue that turns on the manner in which investment decisions have been reached and transactions executive for the account,” the ruling stated.  

The court noted that the secretary chose to promulgate the fiduciary duty rule, aware that it would create conflict with Reg BI and potentially with other state laws. “The Secretary’s decision to reject any effort at coordinating with federal authority and that of other states is the opposite of the direction contained in MUSA and supports the conclusion that by adopting the Fiduciary Duty Rule, the Secretary acted beyond his delegated authority,” Judge Ricciuti added.

30-Day Stay

In finding that the secretary exceeded his authority, the court noted that it did not need to address the constitutional or preemption issues raised in the complaint. The court went on to note, however, that in light of the public policy concerns at issue in the case, it was staying the order for 30 days to permit the secretary time to purse an appeal. In addition, the ruling also did not impact Galvin’s ability to pursue the claims that Robinhood failed to adequately supervise employees.

According to various news reports, Galvin’s office is reviewing the decision and considering its options.