AdvisorHub (January 24, 20240 By Miriam Rozen
The $7.5 million settlement that Massachusetts officials extracted from Robinhood Financial last week could usher in more stringent enforcement or new rules from state regulators, investor advocates argue.
Plaintiff lawyers and investor groups expect, or at least hope, that other states’ regulators will follow Massachusetts’ lead in crafting rules that require brokers to adhere to a fiduciary standard that could be more strict than the Securities and Exchange Commission’s Regulation Best Interest. The Robinhood case, filed in 2020, was the first brought by Secretary of State William Galvin under the state’s own fiduciary rule.
“It’s a pretty big win and other states should follow suit,” Joe Peiffer, the president of the Public Investors Advocate Bar Association, said of the January 18-announced Robinhood agreement.
States’ fiduciary rules could begin applying to a wide array of situations such as when brokers or firms recommend which account is appropriate for an investor, including a self-directed or broker-guided account, Peiffer said.
Massachusetts based their case against Robinhood on allegations that the investing platform developed and deployed be-dazzling apps to prompt inexperienced investors to trade stocks, which Galvin called “gamifying” investor behavior.
The Robinhood settlement underscores “the authority” that states share “to fill gaps in federal law and protect their citizens from predatory banks and other financial firms,” Stephen Hall, the legal director and securities specialist for Better Markets, a nonprofit investor advocacy organization, wrote in a statement following the settlement.
“We hope it will inspire other states to pursue similarly powerful rules that curb broker conflicts of interest and require those recommending securities investments always to do what’s best for their clients,” Hall added.
A spokesperson for the North American Securities Administrators Association, the trade group for state regulators, did not return a request for comment.
Robinhood executives characterized the settlement as resolving historical matters dating back to 2021. The company had already halted use of an app, which sprayed digital confetti on clients’ screens each time they made a trade and had been a centerpiece of the Massachusetts regulator’s allegations.
In August, Massachusetts’ top appellate court rejected Robinhood’s challenge of Galvin’s enforcement action and upheld as lawful the state’s fiduciary rule for broker-dealers. If Robinhood wanted any chance to overturn that state court ruling, it would have had to file an appeal to the U.S. Supreme Court last week, but it opted to settle instead.
But some industry observers expect little to change immediately because of the Robinhood settlement.
Both Massachusetts regulators and the SEC “made it clear years ago that substantial trading encouragement through gamification was going to be an area of vigilance,” according to Scott Smith, the director of advice relationships at Cerulli Associates, an organization that markets research to broker-dealers.
“I don’t anticipate more states pursuing this type of legislation as both the SEC and Secretary Galvin’s office will remain vigilant in this area on behalf of all investors. There is little upside for other Secretaries of State in pursuing such extended and contentious investigations,” Smith said.
But Smith did note that the SEC has said it remains focused on conflicts related to artificial intelligence and algorithms. Such concerns “will be an area of concern and discussion for years to come,” Smith wrote in an email.