"Unlike prior standards of care, which differentiated between broker-dealers and investment advisers in view of their traditionally distinct investment services and offerings, the rule brings the fiduciary obligations of broker-dealers in line with those of investment advisers, making uniform the duties owed by those engaged in the business of providing investment advice regardless of label," Justice Dalila Argaez Wendlandt wrote in her Aug. 25 decision.
The Robinhood lawsuit claimed that Massachusetts Secretary of the Commonwealth William F. Galvin overstepped his authority in implementing the rule.
But in the Aug. 25 decision, the Massachusetts Supreme Judicial Court disagreed and reversed the lower court's decision.
"We further conclude that the fiduciary duty rule does not override the common-law protections available to investors, that MUSA (Massachusetts Uniform Securities Act) is not an impermissible delegation of legislative power, and that the rule is not preempted by the Securities and Exchange Commission's determination to impose a national 'best interest' standard of care on broker-dealers," Ms. Wendlandt wrote.
The Massachusetts rule was enacted in response to an SEC rule package, commonly known as Reg BI for its centerpiece best-interest standard that took effect in 2020 that aims to compel broker-dealers to put clients' financial interests ahead of their own and requires them to mitigate financial conflicts. In announcing the rule in 2020, Mr. Galvin said the SEC's Reg BI didn't go far enough so Massachusetts needed its own rule to protect investors.
Later in 2020, the commonwealth charged Robinhood with "taking advantage of unsophisticated investors to fill its own coffers by dispensing ill-suited investment advice to these customers and by encouraging them to engage in risky trading practices using its online trading platform," the Aug. 25 decision noted.
Following the decision, Mr. Galvin said in statement that the "landmark decision affirms the fiduciary duty of brokers to their customers and vindicates the role of my securities division to principally, but aggressively protect investors and police broker-dealer misconduct."
In a separate statement, Lucas Moskowitz, deputy general counsel and head of government affairs at parent company Robinhood Markets, said: "We are disappointed in today's decision and remain committed to providing access to the markets for our Massachusetts customers. We are in the process of reviewing the opinion and assessing next steps in this matter."