The Massachusetts Secretary of the Commonwealth lacked authority to lay out a fiduciary duty for broker-dealers that conflicted with the established common law, states a decision of the Massachusetts Superior Court. Robinhood Financial successfully challenged the rule, arguing that it contradicts a determination by the Supreme Judicial Court that broker-dealers are not general-purpose fiduciaries of their customers. The order declaring the rule unlawful is stayed for 30 days to allow the Secretary time to appeal (Robinhood Financial, LLC v. Galvin, March 30, 2022, Ricciuti, M.).
Massachusetts v. Reg BI. The online brokerage firm Robinhood Financial challenged the fiduciary rule as a counter to an administrative proceeding charging it with a violation. Its complaint noted that Secretary of the Commonwealth William Galvin had long advocated a "uniform fiduciary standard" for broker-dealers. Nine days after the SEC announced the final version of Regulation Best Interest, which rejected a uniform fiduciary standard, Galvin proposed his own regulation. Despite opposition from Massachusetts Governor Charlie Baker and hundreds of others, Galvin ultimately adopted a final rule under which both broker-dealers and investment advisers have fiduciary obligations in providing advice or recommendations to their customers, the complaint observed.
Existing common law. Both parties agreed that under the common law as it exists now, Patsos v. First Albany Corp. (Mass. 2001) defines the scope of a broker-dealer’s fiduciary responsibility (if any) to its customers. The Patsos Court determined that whether a broker-dealer had fiduciary obligations depended on how much discretion it exercised on behalf of a customer: “Assigning general fiduciary duties only to those stockbrokers who have the ability to, and in fact do, make most if not all of the investment decisions for their customers properly provides appropriate protection only for those customers who are particularly vulnerable to a broker’s wrongful activities.”
The parties differed, however, as to whether the fiduciary rule conflicted with Patsos. Galvin said that the rule was consistent with the case because the rule’s triggering event is the provision of advice and recommendations. But this does not track Patsos, which drew the distinction based on the broker’s relationship with the customer and level of discretion. Broker-dealers who are not subject to fiduciary duties under Patsos may be subject to them under Galvin’s fiduciary rule. By expanding the universe of broker-dealers subject to fiduciary obligations, the fiduciary rule changes the common law as defined in Patsos.
Delegated authority. The court was then left to decide whether the Secretary of the Commonwealth could override the common law to impose otherwise inapplicable fiduciary duties by regulation. Galvin was unable to cite any cases in support of this proposition, and the court’s review found authority in the opposite direction. Galvin proposed a three-step rationale for his authority: 1) the common law is equal in status to laws enacted by the legislature; 2) the legislature can delegate policy implementation to an agency; and 3) a properly promulgated regulation has the force of law. Even if this accurately states the law, the court wrote, the legislature did not delegate authority to the Secretary to interpret the Massachusetts Uniform Securities Act (MUSA) contrary to the Supreme Judicial Court’s interpretation.
The court rejected Galvin’s argument that the delegation could be implied from the statute, given the usual presumption that the legislature does not intend to displace the common law. The court also contrasted the SEC’s action in promulgating Reg BI, where it acted on the express direction of Congress—no such express direction existed for the Massachusetts rule. The language of the MUSA also did not support such a delegation of authority. While the statute allows the Secretary to promulgate rules as necessary to carry out its provisions, this “does not mean that the agency has been delegated unfettered authority to adopt any regulation that the agency concludes is generally consistent with the underlaying statute,” the court wrote.
The MUSA makes clear that the legislature directed the Secretary to strive for uniformity rather than conflict in the state and federal securities laws. The Massachusetts fiduciary rule runs contrary to this direction by overriding Massachusetts common law, conflicting with the federal Reg BI, and by standing alone among the states. The court observed that Galvin chose not to coordinate with other regulators and said that this “decision to reject any effort at coordinating with federal authority and that of other states is the opposite of the direction contained in the MUSA and supports the conclusion that by adopting the Fiduciary Duty Rule, the Secretary acted beyond his delegated authority.”
The case is No. 2184CV00884.
Massachusetts v. Reg BI. The online brokerage firm Robinhood Financial challenged the fiduciary rule as a counter to an administrative proceeding charging it with a violation. Its complaint noted that Secretary of the Commonwealth William Galvin had long advocated a "uniform fiduciary standard" for broker-dealers. Nine days after the SEC announced the final version of Regulation Best Interest, which rejected a uniform fiduciary standard, Galvin proposed his own regulation. Despite opposition from Massachusetts Governor Charlie Baker and hundreds of others, Galvin ultimately adopted a final rule under which both broker-dealers and investment advisers have fiduciary obligations in providing advice or recommendations to their customers, the complaint observed.
Existing common law. Both parties agreed that under the common law as it exists now, Patsos v. First Albany Corp. (Mass. 2001) defines the scope of a broker-dealer’s fiduciary responsibility (if any) to its customers. The Patsos Court determined that whether a broker-dealer had fiduciary obligations depended on how much discretion it exercised on behalf of a customer: “Assigning general fiduciary duties only to those stockbrokers who have the ability to, and in fact do, make most if not all of the investment decisions for their customers properly provides appropriate protection only for those customers who are particularly vulnerable to a broker’s wrongful activities.”
The parties differed, however, as to whether the fiduciary rule conflicted with Patsos. Galvin said that the rule was consistent with the case because the rule’s triggering event is the provision of advice and recommendations. But this does not track Patsos, which drew the distinction based on the broker’s relationship with the customer and level of discretion. Broker-dealers who are not subject to fiduciary duties under Patsos may be subject to them under Galvin’s fiduciary rule. By expanding the universe of broker-dealers subject to fiduciary obligations, the fiduciary rule changes the common law as defined in Patsos.
Delegated authority. The court was then left to decide whether the Secretary of the Commonwealth could override the common law to impose otherwise inapplicable fiduciary duties by regulation. Galvin was unable to cite any cases in support of this proposition, and the court’s review found authority in the opposite direction. Galvin proposed a three-step rationale for his authority: 1) the common law is equal in status to laws enacted by the legislature; 2) the legislature can delegate policy implementation to an agency; and 3) a properly promulgated regulation has the force of law. Even if this accurately states the law, the court wrote, the legislature did not delegate authority to the Secretary to interpret the Massachusetts Uniform Securities Act (MUSA) contrary to the Supreme Judicial Court’s interpretation.
The court rejected Galvin’s argument that the delegation could be implied from the statute, given the usual presumption that the legislature does not intend to displace the common law. The court also contrasted the SEC’s action in promulgating Reg BI, where it acted on the express direction of Congress—no such express direction existed for the Massachusetts rule. The language of the MUSA also did not support such a delegation of authority. While the statute allows the Secretary to promulgate rules as necessary to carry out its provisions, this “does not mean that the agency has been delegated unfettered authority to adopt any regulation that the agency concludes is generally consistent with the underlaying statute,” the court wrote.
The MUSA makes clear that the legislature directed the Secretary to strive for uniformity rather than conflict in the state and federal securities laws. The Massachusetts fiduciary rule runs contrary to this direction by overriding Massachusetts common law, conflicting with the federal Reg BI, and by standing alone among the states. The court observed that Galvin chose not to coordinate with other regulators and said that this “decision to reject any effort at coordinating with federal authority and that of other states is the opposite of the direction contained in the MUSA and supports the conclusion that by adopting the Fiduciary Duty Rule, the Secretary acted beyond his delegated authority.”
The case is No. 2184CV00884.