IT’S A NICE THOUGHT that “broker-dealers” who handle transactions in the ever-changing world of online securities trading platforms should show a basic standard of care to clients, but that may not be Secretary of State Bill Galvin’s call to make.

That’s the central issue at play in a case heard on Wednesday by the Supreme Judicial Court. 

The commission-free trading platform Robinhood says that Galvin’s office overstepped in 2020 when it imposed a fiduciary duty on broker-dealers and subsequently sought to revoke the platform’s license to operate in Massachusetts. In arguments before the state’s highest court, Robinhood’s attorney, Amy Saharia, said that Massachusetts securities law “does not give the secretary the power to make conduct that is ethical under existing federal and state law unethical simply by announcing it to be so.”

A fiduciary duty obligates a person to act in the best interests of a client and try to eliminate or mitigate any conflicts that might interfere with that role. 

Along with breaching that new state standard, Galvin accused Robinhood of using “aggressive tactics to attract new, often inexperienced, investors,” failing to address outages and disruptions on the platform, and using tactics like “gamification” to encourage frequent and repetitive use of the platform.

Robinhood, a California-based company, serves a relatively young client base, which averages 31 years old. 

Federal and state regulators have targeted it before, leading to a $65 million settlement in 2020 with the US Securities and Exchange Commission over allegations that it racked up profits by misleading users about best trade prices; a $57 million fine from broker-dealer overseer FINRA in 2021 for misleading information and outages; and a $30 million fine in 2022 from New York regulators for violating anti-money-laundering and cybersecurity regulations.

Broker-dealers are held to a lower fiduciary standard than investment advisors in federal law because they traditionally offer, at most, general recommendations rather than investment advice. But Robinhood and other broker-dealers are increasingly stepping across that threshold, Galvin argues. 

“When broker-dealers dip their toe into some sort of advice,” Justice Dalila Wendlandt asked, is it reasonable to assume “they are outside of their traditional zone and should be treated more like investment advisors?”

Galvin’s office says they should. But that view was rejected by a lower court, which determined that the secretary went beyond his authority by defining “unethical” and “dishonest” conduct by brokers as failing to act as a fiduciary when recommending trades. SJC justices indicated a bit more interest in Galvin’s argument than the lower court.

State and federal law does not specifically authorize changing the definition in this way, and justices questioned the state sharply on whether earlier action by the SEC rejecting a similar rule means this new rule is preempted. Robinhood’s attorneys said that not only is Galvin’s redefinition in conflict with the SEC, but other states have not made similar changes. 

In Massachusetts, however, securities laws prioritize consumer protection, Justice Serge Georges noted, asking how the Bay State choosing to act first and boldly in this area would be “inconsistent with a broad mandate from the Legislature to go out and protect consumers?”

The justices appeared open to the argument from Assistant Attorney General Phoebe Fischer-Groban, who was representing Galvin’s office, that requiring a broker-dealer to address conflicts of interest could be a reasonable interpretation of regulating unethical and dishonest conduct.

Broker-dealers and the US Chamber of Commerce worry that imposing this fiduciary standard could seriously disrupt the personal investment ecosystem, in which most people use broker-dealers rather than investment advisors. Saharia, Robinhood’s lawyer, argued that Galvin’s office went beyond the general industry standard in defining unethical conduct and could in theory “give the words any meaning.”

Wendlandt seemed skeptical of this “sky-is-falling” argument. “It’s not like the secretary is saying that wearing blue is unethical,” she said. “The specific question is whether this definition is unreasonable.”