The tales of Robin Hood, the heroic outlaw who took from the rich and gave to the poor, have been a part of popular culture as far back as the 1400s. Taking its cue from the popular legend, Robinhood Financial began with its goal of “We’re on a mission to democratize finance for all.” In December of 2020, Massachusetts Secretary of the Commonwealth William Galvin attempted to recast the firm as the Sheriff of Nottingham. Using the newly minted Massachusetts Fiduciary Rule, the Secretary accused Robinhood of using predatory practices with investors, claiming “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.”
The fight about which entity is the protector of the poor reached new heights on April 15th, 2021. Secretary Galvin filed a motion to amend the December complaint to request that Robinhood’s registration be revoked after the company “has continued a pattern of aggressively inducing and enticing trading among its customers.” If successful, any Massachusetts resident would be blocked from using the Robinhood app.
On the same day, Robinhood filed a complaint in the state of Massachusetts, arguing that the Secretary had overstepped his authority in creating the Fiduciary Rule and seeking to overturn the rule itself. Robinhood further signaled its intent with the following public statement “By trying to block Robinhood, the division is attempting to bring its residents back in time and reinstate the financial barriers that Robinhood was founded to break down…We will not succumb to unfounded, politicized allegations and unreasonable demands from the Massachusetts Securities Division.”
This case bears watching as it progresses. Robinhood has decided to fight this in the court system, presumably beyond the state of Massachusetts if necessary. The outcome has the potential to be precedent-setting for years to come. For example, while many industry watchers consider this unlikely, a turnover of the Massachusetts Fiduciary Rule would have a dramatic impact on other states seeking to enact their own standards. Massachusetts is not alone in their belief that the SEC did not go far enough with Regulation Best Interest. Furthermore, even if the Massachusetts rule remains intact, if Robinhood can win the argument that its role as a discount brokerage firm means that its activities are not recommendations it would have far-reaching ramifications for other broker-dealers in similar situations. FINRA has been clear in its concern about platforms similar to Robinhood. New entities seeking to enter the industry to compete directly with Robinhood have found their plans and business models facing significant regulatory scrutiny before they are even approved to conduct business. This case will likely take many months or longer to conclude, long after the heated words and news of the day excitement has worn off. However, its resolution will most likely reverberate in the industry for many years to come.