Under DOL Rule's Shadow, Fiduciary Fight Rages On

Melanie Waddell

The court’s decision “is instrumentally useful for advocates of stronger fiduciary protections in investment advice to make that case,” Tierney said.

Indeed, Ron Rhoades, associate professor of finance at Western Kentucky University and director of its personal financial planning program, said in a recent email that Reg BI “does not impose a fiduciary duty of loyalty” but “a new ‘best interest’ obligation that is still in the process of being defined and applied.”

With a new DOL fiduciary rule on the horizon, he said, “the fiduciary battlegrounds will continue to be active spheres where pro-fiduciary advocates will be pitted against firms whose economic models are threatened by the fiduciary standard.”

Fiduciary Battleground

The Massachusetts Supreme Judicial Court decision “adds additional traction to the ongoing movement in the marketplace, aided by fiduciary advocates and federal and state securities regulators, to move toward a bona fide fiduciary standard,“ according to Rhoades.

The most important aspect of the Massachusetts decision, according to Rhoades, “is that states are not preempted from adopting fiduciary standard by federal securities laws,“ nor by the SEC’s adoption of Reg BI.

While the Massachusetts decision “is not binding upon other state courts, nor on the federal courts, its precedent may well give impetus to at least a few other states to adopt fiduciary standards for broker-dealers when providing investment advice to retail clients.“

An alert from the law firm Ropes & Gray concurred that the Massachusetts ruling “leaves the door open for other state regulators to set more demanding standards applicable to broker-dealers operating in their states,“ and “raises a substantial threat of the very ‘patchwork of inconsistent state-level standards’“ of which former SEC Chairman Jay Clayton warned.

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Further litigation in other state or federal jurisdictions may seek to challenge this reasoning.

Internet Advice

The Ropes & Gray alert also warns that the Massachusetts ruling also applies to investment recommendations or advice provided from outside the state via the internet.

For national broker-dealers, including those operating internet platforms, the decision “further complicates compliance and increases associated costs in states that impose obligations, like the Massachusetts Fiduciary Rule, that extend beyond Regulation BI’s obligations,” the alert said.

“Particular attention will be required to assess what sorts of communications by broker-dealers regarding investment opportunities to retail investors can be construed as investment recommendations or advice subject to heightened state-level standards,” the firm wrote.

For example, in Robinhood’s case, Galvin “claimed Robinhood had encouraged frequent, risky, and unsuitable trading by retail investors, published investment categories like ‘100 Most Popular’ or ‘Top Movers,’ implemented strategies to incentivize customer engagement with its trading platform, and that each of these practices was tantamount to making investment recommendations to customers,” the alert said.

Robinhood’s defenses to these arguments, the firm wrote, “have yet to be addressed by the trial court or in the Secretary’s administrative proceedings — as the litigation to date has focused on the legality of the Massachusetts Fiduciary Rule itself, not its application to Robinhood’s business.”