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.”

JENNIFER SMITH

FROM COMMONWEALTH

April surprise: April, a big month in terms of state tax revenue, delivered a surprise. State tax revenue plunged 23 percent, or about $1.4 billion, below what had been forecasted. The Healey administration said it could deal with the downturn without resorting to emergency spending cuts or nixing a $1 billion tax package.

– Evan Horowitz, the executive director of the Center for State Policy Analysis at Tufts University, blamed the downturn on inflated expectations. He said April revenues traditionally account for 12 percent of annual revenue, but last year  April accounted for 16 percent. State budget officials assumed the 16 percent figure would continue this year, but were wrong, he said.” The problem isn’t the shortfall. It’s the expectations,” Horowitz said. “If nothing else, it’s a reminder that our expectations are subject to the laws of fiscal gravity.” Read more.

OPINION 

Direct admissions: Mary Churchill, a professor at BU Wheelock, says direct admissions – sending an acceptance letter to a student who hasn’t even applied – shows promise for schools and students. Read more.

FROM AROUND THE WEB

BEACON HILL

The Healey administration is adopting a new housing code that will make clear that use of motels to house homeless people is exempt from local zoning restrictions. (Boston Globe)  

A new poll shows more than 70 percent of Massachusetts voters support legislation allowing medication-assisted suicide. (Boston Herald) 

MUNICIPAL MATTERS  

The Belchertown Select Board didn’t like the three candidates put forward for town administrator, so it selected the town’s director of public works, who had applied for the position but didn’t get named as a finalist. (Daily Hampshire Gazette)

Boston will drop its COVID vaccine mandate for city workers as of May 11, the same date state and federal public health emergencies prompted by the pandemic are set to expire. (Boston Herald)

A battle over rules governing short-term rentals on Nantucket is heading for a vote this Saturday. (Boston Globe) A year ago, CommonWealth explored the debate that has divided voters on the island. 

HEALTH/HEALTH CARE

The number of COVID patients at local hospitals is way down, to zero at some facilities. (WBUR)

New England Donor Services, a Waltham-based nonprofit charged with collecting organs and getting them to patients in need, is coming under fire for not doing its job. (WBUR)

EDUCATION

WBUR takes the temperature of education policymaking in Milton by talking to new and old school committee members. 

Lawmakers are giving the go-ahead to a 10-college consortium which will study a coordinated response to mental health crises in student populations. (Worcester Telegram)

ENERGY/ENVIRONMENT

Attorney General Andrea Campbell is singing the same song on competitive electricity suppliers that Maura Healey used to sing. Campbell released new data indicating residents buying electricity from competitive suppliers are getting fleeced and urged lawmakers to pass legislation banning them. Healey, as AG, pushed the issue for years, with little success. (Eagle-Tribune)