Robinhood Financial LLC v. Secretary of the Commonwealth ( 2023 )

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SJC-13381
ROBINHOOD FINANCIAL LLC vs. SECRETARY OF THE COMMONWEALTH &
another.1
Suffolk. May 3, 2023. - August 25, 2023.
Present: Gaziano, Lowy, Cypher, Wendlandt, & Georges, JJ.
Securities. Broker. Investment Advisor. Fiduciary. Secretary
of the Commonwealth. Regulation. Common Law.
Constitutional Law, Delegation of powers, Separation of
powers, Federal preemption. Federal Preemption. Uniform
Securities Act.
Civil action commenced in the Superior Court Department on
April 15, 2021.
The case was heard by Michael D. Ricciuti, J., on motions
for judgment on the pleadings.
The Supreme Judicial Court granted an application for
direct appellate review.
Phoebe Fischer-Groban, Assistant Attorney General, for the
defendants.
Amy Mason Saharia (John S. Williams, of the District of
Columbia, Timothy P. Burke, & Jason S. Pinney also present) for
the plaintiff.
The following submitted briefs for amici curiae:
1 Securities Division of the Office of the Secretary of the
Commonwealth.
2
Ben Robbins & Daniel B. Winslow for New England Legal
Foundation.
Shay Dvoretzky, of the District of Columbia, Eben P. Colby,
& Marley Ann Brumme for Chamber of Commerce of the United States
of America & another.
Robert S. Banks, Jr., of Oregon, & William A. Jacobson for
Cornell Securities Law Clinic.
Timothy Cornell & Patrick J. Dolan for Public Investors
Advocate Bar Association.
Elizabeth Aniskevich & Benjamin Davis, of the District of
Columbia, Stuart Rossman, & Shennan Kavanagh for AARP & others.
Timothy Cornell & Patrick J. Dolan for Institute for the
Fiduciary Standard & another.
Dennis M. Kelleher for Better Markets, Inc.
James F. Radke & Dylan White for North American Securities
Administrators Association, Inc.
WENDLANDT, J. Unlike the fabled "Prince of Thieves," who
took from the rich to give to the poor,2 the plaintiff Robinhood
Financial LLC (Robinhood), is accused by the Secretary of the
Commonwealth (Secretary) of taking advantage of unsophisticated
investors to fill its own coffers by dispensing ill-suited
investment advice to these customers and by encouraging them to
engage in risky trading practices using its online trading
platform. This conduct, the Secretary alleges, violated the
prohibition of the Massachusetts Uniform Securities Act, G. L.
c. 110A (MUSA), against "unethical or dishonest conduct or
practices in the securities, commodities[,] or insurance
business," G. L. c. 110A, § 204 (a) (2) (G) -- a phrase that the
Secretary has defined to require broker-dealers that provide
2 Howard Pyle, The Merry Adventures of Robin Hood (1883).
3
investment advice to retail customers to comply with a
statutorily defined fiduciary duty, see 950 Code Mass. Regs.
§ 12.207(1)(a) (2020) (fiduciary duty rule or rule). Unlike
prior standards of care, which differentiated between broker-
dealers and investment advisers in view of their traditionally
distinct investment services and offerings, the rule brings the
fiduciary obligations of broker-dealers in line with those of
investment advisers, making uniform the duties owed by those
engaged in the business of providing investment advice
regardless of label. The rule, according to the Secretary, was
needed to protect investors confused by the increasingly blurred
line between broker-dealers providing investment advice and
investment advisers.
This case concerns the question whether, by promulgating
the fiduciary duty rule, the Secretary overstepped the bounds of
the authority granted to him under MUSA. We conclude that he
did not. We further conclude that the fiduciary duty rule does
not override the common-law protections available to investors,
that MUSA is not an impermissible delegation of legislative
power, and that the rule is not preempted by the Securities and
Exchange Commission's (SEC) determination to impose a national
"best interest" standard of care on broker-dealers, 17 C.F.R.
4
§ 240.15l-1 (2019) (Regulation Best Interest).3 We therefore
reverse the judgment entered by a Superior Court judge on the
pleadings in a civil action challenging the validity of the
fiduciary duty rule, and we remand the matter for further
proceedings.
1. Background.4 This appeal stems from an administrative
enforcement proceeding brought by the Secretary against
Robinhood, alleging that Robinhood violated MUSA by, inter alia,
engaging in "unethical or dishonest conduct or practices in the
securities, commodities[,] or insurance business," G. L.
c. 110A, § 204 (a) (2) (G). In particular, the Secretary
alleged that Robinhood provided investment recommendations5 to
3 We acknowledge the briefs of amici curiae AARP, AARP
Foundation, and the National Consumer Law Center; Better
Markets, Inc.; the Chamber of Commerce of the United States of
America and the Greater Boston Chamber of Commerce; the Cornell
Securities Law Clinic; the Institute for the Fiduciary Standard
and Tamar Frankel; the New England Legal Foundation; the North
American Securities Administrators Association, Inc.; and the
Public Investors Advocate Bar Association.
4 Because the case comes before us on the parties' cross
motions for judgment on the pleadings, "[w]e recite the facts
'drawn from the parties' pleadings and the exhibits attached
thereto,'" Mullins v. Corcoran, 488 Mass. 275, 276 (2021),
quoting Merriam v. Demoulas Super Mkts., Inc., 464 Mass. 721,
723 (2013), reserving some facts for later discussion.
5 The Secretary claimed that Robinhood encouraged "frequent,
risky, and unsuitable trading" by "[i]nexperienced [i]nvestors,"
published investment categories like "100 Most Popular" or "Top
Movers," and implemented "[s]trategies to [e]ncourage and
[i]ncentivize" customer engagement with its trading platform;
5
its Internet-based6 customers without considering whether those
recommendations were in each customer's best interest; this
conduct, the Secretary contends, violated Robinhood's fiduciary
duties of care and loyalty under the fiduciary duty rule.
Robinhood denies the allegations, maintaining that, as a "self-
directed" brokerage firm, it does not make investment
recommendations or provide investment advice.7
After the Secretary initiated the administrative
proceeding, Robinhood brought the instant action challenging the
validity of the fiduciary duty rule.8 On the parties' cross
motions for judgment on the pleadings, see Mass. R. Civ. P.
12 (c), 365 Mass. 754 (1974), a Superior Court judge determined
each such practice, the Secretary alleged, was tantamount to
making investment recommendations to customers. The
administrative complaint also alleged that Robinhood "targeted
young individuals with little or no investment experience;
lacked adequate infrastructure and, as a result, experienced
repeated outages and disruptions on its trading platform; . . .
and failed to follow its own written supervisory procedures when
approving customers for options trading."
6 Robinhood provides its services on a mobile application
and website-based trading platform, which, as of 2021, were two
of the most common methods for placing trades. See Lin,
Bumcrot, Mottola, Valdes, & Walsh, FINRA Investor Education
Foundation, Investors in the United States: The Changing
Landscape 10 (Dec. 2022).
7 We address only the purely legal issues presented on
appeal, which are unaffected by this dispute of material fact.
8 In addition to 950 Code Mass. Regs. § 12.207(1)(a),
Robinhood challenges the sections of Title 950 that refer to it.
6
that the Secretary acted ultra vires,9 exceeding his authority in
promulgating the rule. The Secretary appealed, and we allowed
Robinhood's unopposed application for direct appellate review.
2. Regulatory framework. A brief review of the regulatory
framework for investment service providers grounds our analysis
of Robinhood's legal arguments, which are rooted in the
traditional differences between the investment services provided
by broker-dealers and investment advisers, as well as the
different standards of care that consequently have been
applicable to each.
a. Investment services. Historically, broker-dealers have
offered services to facilitate and execute securities
transactions chosen by their customers, earning commissions on
these trades.10 At most, they have provided, free of any
9 "Ultra vires," which is Latin for "beyond the powers
(of)," describes actions that are "beyond the scope of power
allowed or granted by . . . law." Black's Law Dictionary 1833
(11th ed. 2019). "When an agency acts beyond the scope of
authority conferred to it by statute, its actions are invalid
and ultra vires." Armstrong v. Secretary of Energy & Envtl.
Affairs, 490 Mass. 243, 247 (2022).
10See G. L. c. 110A, § 401 (c) (defining broker-dealer as
"any person engaged in the business of effecting transactions in
securities for the account of others or for his own account").
See also 15 U.S.C. §§ 77b(a)(12) (defining dealer as person who
engages "in the business of offering, buying, selling, or
otherwise dealing or trading in securities issued by another
person"), 78c(a)(4)(A) (defining broker as person "engaged in
the business of effecting transactions in securities for the
account of others").
7
additional fee, investment advice that was solely incidental to
the effected transactions.11
By contrast, investment advisers traditionally have
provided ongoing investment advice, often taking the
responsibility of continuous account management.12 Rather than
charging a commission for each transaction, investment advisers
usually charged a periodic fee calculated as a percentage of a
customer's assets under management.
As a result of the different investment services offered by
each, Federal and State law historically have held broker-
dealers and investment advisers to different standards of care.
Investment advisers, because of their trusted advisory role,
generally must comply with the full complement of fiduciary
duties of "utmost good faith, and full and fair disclosure of
all material facts," and shoulder an "affirmative obligation to
11See Investment Advisers Act of 1940, 15 U.S.C. § 80b-
2(a)(11)(C) (Investment Advisers Act) (excluding broker-dealers
from definition of investment adviser if their "performance of
[investment advice] services is solely incidental to the
conduction of [their] business as a broker or dealer" and if
they "receive[] no special compensation therefor"); G. L.
c. 110A, § 401 (m) (1) (F) (excluding registered broker-dealers
from definition of investment adviser).
12See G. L. c. 110A, § 401 (m) (defining investment adviser
as "any person who, for compensation, engages in the business of
advising others, either directly or through publications or
writings, as to value of securities or as to the advisability of
investing in, purchasing, or selling securities"). See also 15
U.S.C. § 80b-2(a)(11) (same).
8
'employ reasonable care to avoid misleading'" clients (citations
omitted). Securities & Exch. Comm'n v. Capital Gains Research
Bur., Inc., 375 U.S. 180, 194 (1963). See Investment Advisers
Act of 1940, 15 U.S.C. § 80b-6 (Investment Advisers Act).
Broker-dealers, because of their more limited role, have
been subject to traditional agency principles when executing
customers' transactions. See, e.g., Hill v. Bache Halsey Stuart
Shields Inc., 790 F.2d 817, 824 (10th Cir. 1986) (broker, as
customer's agent, generally owed fiduciary duties, but scope of
duties turned on nature of broker's responsibilities because
agent is only fiduciary within scope of agency). In addition,
where a broker-dealer made a recommendation incidental to
effecting a transaction, a broker-dealer must "have [had] a
reasonable basis to believe that a recommended transaction or
investment strategy involving a security or securities is
suitable for the customer, based on the information obtained
through the reasonable diligence of the [broker-dealer] to
ascertain the customer's investment profile." Financial
Industry Regulatory Authority, Inc. (FINRA), FINRA rule 2111(a),
https://www.finra.org/rules-guidance/rulebooks/finra-rules/2111
[https://perma.cc/RCS4-4KKX] (suitability standard).13
13As discussed infra, a broker-dealer also is subject to
common-law obligations of care, the precise contours of which
9
Over time, the once-clear dichotomy between the services
offered by broker-dealers, on the one hand, and investment
advisers, on the other, has "blurred." XY Planning Network, LLC
v. United States Sec. & Exch. Comm'n, 963 F.3d 244, 247 (2d Cir.
2020). Certain broker-dealers expanded the types of services
and products they offered to retail customers, "often
provid[ing] advice and mak[ing] recommendations about securities
transactions and investment strategies." Id. at 248.14 These
broker-dealers also changed their marketing; "financial services
firms began to use a variety of titles to describe their
personnel, such as 'financial advis[er],' 'financial
consultant,' and 'advis[er],'" Securities and Exchange
Commission, Study on Investment Advisers and Broker-Dealers as
Required by Section 913 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act 99 (Jan. 2011), https://www.sec.gov
vary depending on the relationship between the broker-dealer and
the client.
14 See Laby, Selling Advice and Creating Expectations: Why
Brokers Should be Fiduciaries, 87 Wash. L. Rev. 707, 730 (2012)
("The birth of electronic markets and the development of
electronic trading[, which] automated much of the day-to-day
enterprise of transaction execution without the use of [broker-
dealers]," led broker-dealers to enhance their services by
providing advice, "tilt[ing] the balance of brokers' activity
away from execution and toward advice"). See also Note,
Regulation Best Interest and the State-Agency Conflict, 120
Colum. L. Rev. 1591, 1597-1598 (2020) (detailing history of
broker-dealers beginning to offer financial planning services in
1980s and shifting from charging commission on trades to fee-
based pricing).
10
/news/studies/2011/913studyfinal.pdf [https://perma.cc/7THA-
E22R] (Section 913 study, discussed infra).15
Additionally, some broker-dealers' compensation models
morphed. Rather than charging commissions, some broker-dealers
draw revenue from "payments for order flow" -- "a method of
transferring some of the trading profits from market making to
the brokers that route customer orders to specialists for
execution," Securities & Exchange Commission, Special Study:
Payment for Order Flow and Internalization in the Options
Markets (Dec. 2020), https://www.sec.gov/news/studies/ordpay.htm
[https://perma.cc/PE6G-TS7G].16 Under this compensation model, a
15See Hauptman & Roper, Consumer Federation of America,
Financial Advisor or Investment Salesperson? Brokers and
Insurers Want to Have it Both Ways 10-11 (2017),
https://consumerfed.org/wp-content/uploads/2017/01/1-18-17-
Advisor-or-Salesperson_Report.pdf [https://perma.cc/FM53-Z988]
("In addition to describing their financial professionals as
advis[e]rs and describing their services as advisory in nature,
sales-based firms also routinely use messaging that is designed
to foster a relationship of trust and reliance," e.g., "Our
clients always come first," and "Everything we are, do and hope
to achieve . . . is driven by a straightforward mission: To
provide the best financial advice and service to our clients"
[citations omitted]).
16Payments for order flow involve "a type of volume
discount -- in either cash or in-kind services -- by which
market makers (who actually execute securities transactions)
reward brokers for having directed business to them." Gilman v.
BHC Sec., Inc., 104 F.3d 1418, 1420 (2d Cir. 1997). See Note,
Why Robinhood is Not a Fiduciary, 39 Yale J. Reg. 1445, 1469
(2022) (under payment for order flow model, broker-dealer firms
could be "engaged in the practice of skimming off the top of
orders and giving users a higher price").
11
broker-dealer's revenues are tied to the number of trades its
customers execute, arguably providing an incentive to prefer
third parties with the best rebate for the broker-dealer, see
Gilman v. BHC Sec., Inc., 104 F.3d 1418, 1423-1424 (2d Cir.
1997), over those with the best execution price for clients.17
These industry transformations have made the securities
markets more readily available to more investors;18 however, the
changes also have caused consumer confusion and investor harm
despite the existing suitability standard for broker-dealers,
see Section 913 study, supra at 93-94. As a result, Federal and
State authorities have questioned whether adhering to the
traditional dichotomy between the standard of care owed to
customers by broker-dealers and investment advisers continues to
make sense in this evolving marketplace. See infra.
b. SEC's Regulation Best Interest. Congress, for example,
passed the Dodd-Frank Wall Street Reform and Consumer Protection
Act (Dodd-Frank), Pub. L. No. 111-203, § 913, 124 Stat. 1376,
1824-1830 (2010), authorizing the SEC to promulgate a new
standard of care for broker-dealers suitable to the evolving
17See Duggan, Forbes Advisor, Could the SEC End Payment for
Order Flow? (Aug. 22, 2022), https://www.forbes.com/advisor
/investing/payment-for-order-flow/ [https://perma.cc/K42K-64EW].
18According to Robinhood, its business model has "created
competition in the brokerage industry," increasing consumers'
access to the investment market and causing other broker-dealers
to eliminate commissions, a trend called the "Robinhood effect."
12
landscape and equal to "the standard of conduct applicable to
. . . investment adviser[s] under . . . the Investment Advisers
Act," Dodd-Frank § 913(g)(1), 124 Stat. at 1828. It asked the
SEC to consider whether, when providing investment advice to
retail customers, broker-dealers should be required to "act in
the best interest of the customer without regard to the
financial or other interest of the [broker-dealer] providing the
advice." Dodd-Frank § 913(g)(2), 124 Stat. at 1828. Congress
also directed the SEC to conduct a study (Section 913 study) to
evaluate "the effectiveness of existing legal or regulatory
standards of care for [broker-dealers] . . . for providing
personalized investment advice and recommendations about
securities to retail customers" and to review "whether there are
legal or regulatory gaps" in the existing regulatory scheme
relating to such standards of care. Dodd-Frank § 913(b), 124
Stat. at 1824.
The subsequent study confirmed that retail investors often
"d[id] not understand the differences between investment
advisers and broker-dealers or the standards of care applicable
to broker-dealers and investment advisers"; information gathered
regarding "investor understanding of the roles, duties[,] and
obligations of investment advisers and broker-dealers . . .
reflect[ed] confusion by retail investors regarding the roles,
titles, and legal obligations of investment advisers and broker-
13
dealers." Section 913 study, supra at v. In the Section 913
study's findings, the authors recommended the adoption of a
"uniform fiduciary standard . . . regardless of the regulatory
label (broker-dealer or investment adviser) of the professional
providing the advice [emphasis added]." Id. at v-viii.
The SEC stopped short of proposing a uniform standard.
Instead, it proposed a general obligation on broker-dealers,
requiring that
"all broker-dealers . . . when making a recommendation of
any securities transaction or investment strategy involving
securities to a retail customer, act in the best interest
of the retail customer at the time the recommendation is
made without placing the financial or other interest of the
broker-dealer . . . ahead of the interest of the retail
customer" (general obligation).
Regulation Best Interest, Release No. 34-83062, 83 Fed. Reg.
21,574, 21,575 (May 9, 2018).
In July 2019, the SEC adopted the Regulation Best Interest
notwithstanding the Secretary's concerns that the general
obligation would fail to protect investors who were confused by
the differences between investment advisors providing investment
advice and recommendations and broker-dealers who also gave
investment advice and recommendations.19 See Regulation Best
19The Secretary criticized the proposed general obligation
and urged the SEC instead to adopt a "strong uniform fiduciary
standard" that would impose on broker-dealers a fiduciary duty
to customers equal to that of investment advisers. Secretary of
the Commonwealth, Comment Letter on "Regulation Best Interest"
14
Interest, Release No. 34-86031, 84 Fed. Reg. 33,318, 33,329-
33,330 (July 29, 2019); 17 C.F.R. § 240.15l-1 (2019). The SEC
explained that the general obligation comprised four component
parts: (1) a "[d]isclosure obligation," requiring broker-
dealers to fully and fairly disclose, in writing, any material
facts relating to the scope and terms of the relationship with
the customer, including material conflicts of interest related
to investment recommendations, prior to or at the time of the
recommendation; (2) a "[c]are obligation," requiring broker-
dealers to exercise "reasonable diligence, care, and skill" when
making a recommendation to a retail customer, including
developing a "reasonable basis" to believe that a recommendation
is in the "best interest" of a particular customer; (3) a
"[c]onflict of interest obligation," requiring that broker-
dealers have and enforce written policies and procedures
reasonably designed to identify, mitigate, and disclose
Proposal, Release No. 34-83062, at 1 (Aug. 7, 2018). "As a
regulator," the Secretary wrote, he had "seen the grievous harm
suffered by Main Street investors who mistakenly trusted and
relied on conflicted investment advice [given by broker-
dealers]." Id. The proposed best interest standard for broker-
dealers, the Secretary continued, was "for all intents and
purposes substantially the same as the current suitability
standard," and, he predicted, it would "foster confusion and
. . . fail to protect vulnerable investors." Id. at 2. "If the
Commission [did] not adopt a strong and uniform fiduciary
standard," the Secretary explained, "Massachusetts [would] be
forced to adopt its own fiduciary standard to protect [its]
citizens from conflicted advice by broker-dealers." Id. at 1.
15
conflicts of interest, and to prevent conflicts that would cause
them to make recommendations that place their own interests
ahead of customers'; and (4) a "[c]ompliance obligation,"
requiring broker-dealers to adopt and enforce written policies
and practices "reasonably designed to achieve compliance with"
the Regulation Best Interest. 17 C.F.R. § 240.15l-1(a)(2)(i)-
(iv).
c. Fiduciary duty rule. Responding to the SEC's decision
not to apply a uniform standard, the Secretary published a
preliminary solicitation for public comments on a proposed State
"regulation to apply a fiduciary conduct standard on broker-
dealers, agents, investment advisers, and investment adviser
representatives when dealing with their customers and clients."
See Secretary of the Commonwealth, Securities Division,
Preliminary Solicitation of Public Comments: Fiduciary Conduct
Standard for Broker-Dealers, Agents, Investment Advisers, and
Investment Adviser Representatives (June 14, 2019) (Preliminary
Solicitation for Public Comments). He noted the "severe
financial harm" investors had experienced despite the prior
suitability standard, and he criticized the Regulation Best
Interest for failing to define the key term "best interest," and
setting "ambiguous requirements for how longstanding conflicts
in the securities industry must be addressed." Id.16
A uniform fiduciary duty rule was necessary for the
protection of Massachusetts investors and was in the public
interest, the Secretary concluded, because investors often
lacked the "education and background" to navigate the
disclosures distinguishing between broker-dealers and investment
advisers. Preliminary Solicitation for Public Comments, supra.
He relied on empirical studies demonstrating that some investors
were "fundamentally confused about the differences between
broker-dealers and investment advisers" when receiving
investment advice. Id.
In December 2019, the Secretary issued a superseding
request for comment on a revised draft rule, in which he
reiterated that the fiduciary duty rule was necessary to protect
investors because it would ensure that broker-dealers, who were
increasingly "hold[ing] themselves out as providing[] trusted
advice" to investors, would be held to the "same fiduciary
standard as investment advisers when providing advice."
Secretary of the Commonwealth, Securities Division, Solicitation
of Comments on Proposed Fiduciary Conduct Standard for Broker-
Dealers, Agents, Investment Advisers, and Investment Adviser
Representatives 2 (Dec. 13, 2019) (Solicitation of Comments).
It would require broker-dealers to "make recommendations and
provide advice based on what is best for the customer or client,
without regard to the interests of any other person." Id. at 5.
17
The Secretary also responded to concerns that imposing a
fiduciary duty on broker-dealers would "effectively restrict
investor choice and access to products and services by
increasing the cost of advice." Solicitation of Comments, supra
at 3. He explained that "[w]hen preserving 'choice' means
preserving the option to choose opaque, poorly understood
products that are sold via heavily conflicted advice, the
benefits of such 'choice' are illusory." Id. He continued,
"[t]here is no room for 'you get what you pay for' when it comes
to the quality and integrity of investment advice." Id. at 3-4.
Moreover, he concluded that the fiduciary duty rule would
"enhance[] the quality of advice in the transactional, episodic
brokerage model without imposing any new ongoing obligations
upon those providing it." Id. at 4.
In March 2020, the Secretary promulgated the fiduciary duty
rule. The rule deems it "unethical or dishonest conduct or
practices" under G. L. c. 110A, § 204 (a) (2) (G), for a broker-
dealer to "fail[] to act in accordance with a fiduciary duty to
a customer[20] when providing investment advice or recommending an
20 The term "customer" is defined to exclude:
"(a) [a] bank, savings and loan association, insurance
company, trust company, or registered investment company;
(b) [a] broker-dealer registered with a [S]tate securities
commission . . . ; (c) [a]n investment adviser registered
with the SEC under the Investment Advisers Act of 1940
18
investment strategy, the opening of or transferring of assets to
any type of account, or the purchase, sale, or exchange of any
security." 950 Code Mass. Regs. § 12.207(1)(a).21 The rule
requires broker-dealers that provide investment advice to adhere
"to duties of utmost care and loyalty to the customer," bringing
their fiduciary obligations when providing investment advice
more in line with the standards applicable to investment
advisors. 950 Code Mass. Regs. § 12.207(2). The "duty of
care," the rule explains, requires "a broker-dealer or agent to
use the care, skill, prudence, and diligence that a person
acting in a like capacity and familiar with such matters would
use, taking into consideration all of the relevant facts and
circumstances."22 950 Code Mass. Regs. § 12.207(2)(a). The
§ 203 or with a [S]tate securities commission (or agency or
office performing like functions); or (d) [a]ny other
institutional buyer, as defined [by regulation]."
950 Code Mass. Regs. § 12.207(3).
21Pursuant to 950 Code Mass. Regs. § 12.204(1)(a)(29),
violation of 950 Code Mass. Regs. § 12.207 is "grounds for
imposition of an administrative fine, censure, denial,
suspension[,] or revocation of a registration, or such other
appropriate action."
22To comply with the duty of care, broker-dealers "shall
make reasonable inquiry," which requires consideration of "[t]he
risks, costs, and conflicts of interest related to all
recommendations made and investment advice given"; "[t]he
customer's investment objectives, risk tolerance, financial
situation, and needs"; and "[a]ny other relevant information."
950 Code Mass. Regs. § 12.207(2)(a)(1)-(3).
19
"duty of loyalty" requires a broker-dealer or agent to
(1) "[d]isclose all material conflicts of interest"; (2) "[m]ake
all reasonably practicable efforts to avoid conflicts of
interest, eliminate conflicts that cannot reasonably be avoided,
and mitigate conflicts that cannot reasonably be avoided or
eliminated"; and (3) "[m]ake recommendations and provide
investment advice without regard to the financial or any other
interest of any party other than the customer." 950 Code Mass.
Regs. § 12.207(2)(b)(1)-(3). "Disclosing conflicts alone does
not meet or demonstrate the duty of loyalty." 950 Code Mass.
Regs. § 12.207(2)(c).
3. Discussion. a. Standard of review. "We review the
allowance of a motion for judgment on the pleadings de novo."
Mullins v. Corcoran, 488 Mass. 275, 281 (2021). "In deciding
the motion, all facts pleaded by the [party who did not prevail
below] must be accepted as true." Id., citing Jarosz v. Palmer,
436 Mass. 526, 529-530 (2002). "We . . . may rely on 'matters
of public record, orders, items appearing in the record of the
case, and exhibits attached to the complaint.'" Mullins, supra,
quoting Schaer v. Brandeis Univ., 432 Mass. 474, 477 (2000).
Each issue on appeal is a question of law, likewise subject to
de novo review. See Fournier v. Secretary of the Exec. Office
of Health & Human Servs., 488 Mass. 43, 50 (2021), citing
20
Guilfoil v. Secretary of the Exec. Office of Health & Human
Servs., 486 Mass. 788, 793 (2021).
b. Secretary's authority under MUSA. We turn first to
Robinhood's contention that issuance of the fiduciary duty rule
exceeded the Secretary's authority under MUSA because the rule
upsets the long-standing regulatory framework described supra,
pursuant to which broker-dealers traditionally were subject to a
different standard of care from that applicable to investment
advisers. Our analysis begins with the recognition that "[d]uly
promulgated regulations of an administrative agency are
presumptively valid and 'must be accorded all the deference due
to a statute.'" Craft Beer Guild, LLC v. Alcoholic Beverages
Control Comm'n, 481 Mass. 506, 520 (2019), quoting Pepin v.
Division of Fisheries & Wildlife, 467 Mass. 210, 221 (2014).
Accordingly, "[t]he burden of demonstrating invalidity rests
squarely on the party challenging the regulation." Craft Beer
Guild, LLC, supra, citing Pepin, supra.Adopted in 1972, MUSA was designed to protect investors by
regulating securities offerings in the Commonwealth. Bulldog
Investors Gen. Partnership v. Secretary of the Commonwealth, 460
Mass. 647, 652, 655 (2011), cert. denied, 566 U.S. 987 (2012)
(MUSA "largely tracks" Federal Securities Act of 1933, purpose
of which was "to protect investors"). MUSA broadly authorizes
the Secretary to administer the law, giving him extensive
21
investigative and enforcement powers. See G. L. c. 110A,
§§ 406 (a), 407-408.23 MUSA permits the Secretary to make rules
that "are necessary to carry out the provisions of [MUSA],"
including rules that "defin[e] any terms, whether or not used in
[MUSA], insofar as the definitions are not inconsistent with the
provisions of [MUSA]." G. L. c. 110A, § 412 (a). The
authorization permits the Secretary discretion to establish
regulations "necessary or appropriate in the public interest or
for the protection of investors and consistent with the purposes
fairly intended by the policy and provisions of [MUSA]." G. L.
c. 110A, § 412 (b). See, e.g., Massachusetts Fed'n of Teachers,
AFT, AFL-CIO v. Board of Educ., 436 Mass. 763, 773 (2002).24
The broad-ranging authority evinces the Legislature's
determination that the Secretary is best "suited to the task of
clarifying the Legislature's plan through specific rules,"
23The Secretary is delegated the authority to, for example,
investigate and sanction misconduct under MUSA by broker-
dealers, including by issuing subpoenas and cease-and-desist
orders, and levying fines or other sanctions. G. L. c. 110A,
§§ 204, 407, 407A.
24In Massachusetts Fed'n of Teachers, AFT, AFL-CIO, 436
Mass. at 773, we recognized that a rulemaking delegation
provision akin to MUSA's -- providing the Board of Education
with the "authority to promulgate, amend[,] and rescind such
rules and regulations as may be necessary to carry out the
provisions of [the educator qualifications section of the
Education Reform Act]," see id. at 768, quoting G. L. c. 71,
§ 38G -- gave the agency broad authority to adopt regulations to
fulfill the statutory mandate.
22
Goldberg v. Board of Health of Granby, 444 Mass. 627, 633-634
(2005), and its conclusion that the Secretary, because of his
"experience, technical competence, and specialized knowledge" is
well positioned to address the program of reform at issue, Souza
v. Registrar of Motor Vehicles, 462 Mass. 227, 229 (2012),
quoting G. L. c. 30A, § 14 (7), which in the case of MUSA is
investor protection, see Bulldog Investors Gen. Partnership, 460
Mass. at 652, 655. Relevant here, the "Legislature's silence"
as to the particular "conduct or practice" deemed to be
"unethical or dishonest" for purposes of an enforcement action
under G. L. c. 110A, § 204 (a) (2) (G),25 coupled with the wide
authorization given to the Secretary under MUSA, constitutes "an
invitation to [the Secretary] to fill the gap with appropriate
regulation." McCauley v. Superintendent, Mass. Correctional
Inst., Norfolk, 491 Mass. 571, 585-586 (2023), quoting
Massachusetts Teachers' Retirement Sys. v. Contributory
Retirement Appeal Bd., 466 Mass. 292, 301 (2013). See, e.g.,
Purity Supreme, Inc. v. Attorney Gen., 380 Mass. 762, 771 (1980)
25Robinhood mistakenly asserts that the Secretary's
definition of "unethical or dishonest conduct or practices" to
include the failure to abide by the fiduciary duty rule is
inconsistent with the dictionary definitions of those terms.
See Black's Law Dictionary 790 (4th rev. ed. 1968) (defining
"fraudulent or dishonest act" as one that "involves bad faith, a
breach of honesty, a want of integrity, or moral turpitude");
id. at 1698 (defining "unethical" as "not according to business
or professional standards").
23
("The purpose of an open-ended legislative use of the words
'unfair' and 'deceptive' [in G. L. c. 93A, the consumer
protection statute] was to allow for the regulation [by the
Attorney General] of future, as-yet-undevised, business
practices").
Pursuant to this expansive authority, before adopting the
fiduciary duty rule, the Secretary considered, inter alia, the
Securities Division's enforcement experience, empirical studies,
the Section 913 study and its recommendations, and public
comments related to the relationship between broker-dealers and
their customers. See generally Solicitation of Comments, supra.
Many investors, these sources highlighted, did not understand
the different standards of care required of broker-dealers and
investment advisers because of the increasingly blurred lines
between the two as broker-dealers expanded their offerings,
changed their marketing to the public, and moved to different
compensation models. Increasingly, investors mistakenly
believed that the broker-dealers had a fiduciary obligation
equal to investment advisers to act in their customers' best
interests, as discussed supra, and this mistake resulted in
investor harm.26 See Section 913 study, supra at v. Indeed, the
26See A.A. Hung, N. Clancy, J. Dominitz, E. Talley, C.
Berrebi, & F. Suvankulov, RAND Institute for Civil Justice,
Investor and Industry Perspectives on Investment Advisers and
24
recommendation of the authors of the report following the
Section 913 study, which conducted a comprehensive investigation
at the national level, also was to impose a "uniform fiduciary
standard" applicable to both broker-dealers and investment
advisers, in order to best protect investors. Id.
As a result of the Secretary's investigation, he concluded
that the fiduciary duty rule best ensured that MUSA's
protections aligned with investors' expectations in the evolving
investment landscape. Accordingly, the Secretary determined
that the fiduciary duty rule was necessary to fulfill MUSA's
broad investor protection purpose, consistent with the
Secretary's obligation to police "unethical or dishonest conduct
or practices," pursuant to G. L. c. 110A, § 204 (a) (2) (G).
i. Industry norms. Despite the authority given to the
Secretary under MUSA, Robinhood maintains that, because MUSA
proscribes "any unethical or dishonest conduct or practices in
the securities, commodities[,] or insurance business" (emphasis
added), G. L. c. 110A, § 204 (a) (2) (G), the Legislature
implicitly adopted a standard of care limited to existing
Broker-Dealers 115 (2008) ("the industry is becoming
increasingly complex and intertwined and . . . investors do not
operate with a clear understanding of the different functions
and fiduciary responsibilities of their financial
professionals"); id. at 113 (household investor study revealed
that "the roles of broker-dealers and investment advisers are
confusing to most survey respondents and focus-group
participants").
25
industry norms, which traditionally have treated broker-dealers
differently from investment advisers as regards the standard of
care owed to customers. This argument fails to consider the
extensive record relied on by the Secretary showing that the
industry has strayed from the traditional model for the
provision of investor services, as broker-dealers have changed
their offerings, marketing, and compensation models. See
discussion supra.
In response to this industry change and the resulting
investor confusion and harm, the SEC already altered "industry
norms," by imposing on broker-dealers increased fiduciary
obligations under the Regulation Best Interest; and, concluding
that those were insufficiently clear to address investor
confusion, the Secretary adopted a uniform fiduciary duty rule.
To be sure, the rule imposes an obligation on broker-dealers
beyond that attendant to the prior suitability standard, see
supra, and is clearer than the standard under Regulation Best
Interest, which does not define "best interest." But the rule
is driven by changes in the prior "norms" of the marketplace
that have caused investor harm, the Secretary found.27
27Contrary to Robinhood's argument, the fact that other
State courts, in assessing the constitutionality of the phrase
"unethical or dishonest conduct or practices" against charges of
vagueness, construed "unethical or dishonest conduct or
practices" through the lens of industry norms does not confine
26
Consistent with his extensive authority and the flexibility
it necessarily portends, the Secretary permissibly adapted the
standard of care required of these new-age broker-dealers, who
have themselves adopted new business models inconsistent with
their traditional roles and prior industry norms,28 to carry out
his charge under MUSA to protect investors, see Marram v.
Kobrick Offshore Fund, Ltd., 442 Mass. 43, 54 (2004) (MUSA has
"consumer-oriented focus"). MUSA authorizes the Secretary to
define the phrase "unethical or dishonest conduct or practices,"
so long as he does so consistent with the purpose of MUSA to
protect investors; his determination that the fiduciary duty
rule was necessary for that purpose is owed deference, where, as
here, the conclusion is supported by the extensive regulatory
the phrase to existing industry standards of care here, where
the phrase is defined by regulation. See, e.g., Brewster v.
Maryland Sec. Comm'r, 76 Md. App. 722, 728-729 (1988); Johnson-
Bowles Co. v. Division of Sec. of the Dep't of Commerce of Utah,
829 P.2d 101, 112 (Utah Ct. App. 1992).
28We disagree that the phrase "in the securities,
commodities[,] or insurance business" suggests a Legislative
intent to circumscribe the Secretary's authority to then-
existing industry norms. Rather, the phrase specifies the
relevant context to which the provision applies -- namely, "in
the securities, commodities[,] or insurance business," and not
in other types of businesses, as the drafters of the provision
explained. See L. Loss, Commentary on the Uniform Securities
Act, draftsmen's commentary to § 204, at 32 (1976) (phrase
"limited to dishonest and unethical practices in the securities
business," not in "the myriad forms of business generally in
which an applicant may have engaged"). See also Marram v.
Kobrick Offshore Fund, Ltd., 442 Mass. 43, 50-53, 56 (2004)
(citing drafters' commentary as persuasive authority).
27
record. See Goldberg, 444 Mass. at 633-634 (State agency has
"considerable leeway in interpreting a statute it is charged
with enforcing, unless a statute unambiguously bars the agency's
approach" [quotation and citation omitted]).
ii. Policy of uniformity. Robinhood next asserts that the
fiduciary duty rule cannot be reconciled with G. L. c. 110A,
§ 415, which provides that MUSA "shall be so construed as to
effectuate its general purpose to make uniform the law of those
[S]tates which enact it and to coordinate the interpretation and
administration of this chapter with the related [F]ederal
regulation." We already have rejected the argument that this
provision "mandate[s] that [State] courts adopt the
interpretation of comparable Federal [and State] securities
statutes," see Hays v. Ellrich, 471 Mass. 592, 605, cert.
denied, 577 U.S. 985 (2015); we see no reason why it would
require the Secretary to do so in this context -– a point
confirmed by the provision's drafters. See L. Loss, Commentary
on the Uniform Securities Act, draftsmen's commentary to § 415,
at 165 (1976) (§ 415 was not intended to mean "that a [S]tate
court or Administrator is required to follow a judicial or
28
administrative precedent set by another [S]tate or by the
SEC").29
Nor does G. L. c. 110A, § 412 (b), support Robinhood's
position. It states that the Secretary "may cooperate with the
securities administrators of the other [S]tates and the [SEC]"
when "prescribing rules and forms," "with a view to effectuating
the policy of this statute to achieve maximum uniformity in the
form and content of registration statements, applications, and
reports wherever practicable" (emphasis added). G. L. c. 110A,
§ 412 (b). The plain text does not require uniformity in the
Secretary's determination of substantive policy.30
At bottom, Robinhood's arguments "reduce[] to the
proposition that, had it been charged with enforcing [MUSA],
[it] would have chosen a different regulatory approach,"
29Robinhood's proposed construction of G. L. c. 110A,
§ 415, would freeze the ability to adapt to changes in the
industry that require new standards of conduct. Pursuant to
MUSA, the Legislature authorized the Secretary -- not the SEC or
sister States' regulatory agencies -- to promulgate rules
responsive to industry changes. See Ciampi v. Commissioner of
Correction, 452 Mass. 162, 168 (2008) ("When the Legislature
vests an agency with broad authority to effectuate the purposes
of an act the validity of a regulation promulgated thereunder
will be sustained so long as it is reasonably related to the
purposes of the enabling legislation" [quotations and citation
omitted]).
30Even with regard to forms, registration statements,
applications and reports, the requirement applies only to the
extent feasible. See Black's Law Dictionary 1335 (4th rev. ed.
1968) (defining "practicable" as "performable, feasible,
possible").
29
Goldberg, 444 Mass. at 635. But our task is not to pass
judgment on the wisdom of the policy. We conclude only that the
Secretary had the discretion to make that determination, and
that, in view of the record of investor harm, his ability to do
so falls within the authority bequeathed to him under MUSA.
c. Common law. Robinhood next argues that the fiduciary
duty rule is invalid because it abrogates the common law as set
forth in Patsos v. First Albany Corp., 433 Mass. 323 (2001). We
disagree.
As we explained in Patsos, under the common law, a
"relationship between a [broker-dealer] and a customer may be
either a fiduciary or an ordinary business relationship,
depending on whether the customer provides sufficient evidence
to prove 'a full relation of principal and broker.'" Patsos,
433 Mass. at 331-332. The determination of the "scope of a
[broker-dealer's] fiduciary duties in a particular case is a
factual issue that turns on the manner in which investment
decisions have been reached and transactions executed for the
account." Id. at 332. We observed that where broker-dealers
are entrusted with investment discretion, they "assume[] broad
fiduciary obligations that extend beyond individual
transactions." Id. at 333. But where the "the customer makes
the investment decisions and the stockbroker merely receives and
30
executes a customer's orders, the relationship generally does
not give rise to general fiduciary duties." Id.In each case, the fact-intensive inquiry is guided by "two
potentially competing considerations: the need to protect
customers who relinquish control of their brokerage accounts,
and the need to ensure that securities broker[-dealers] --
particularly those who merely execute purchase and sell orders
for customers -- not become insurers of their customers'
investments." Patsos, 433 Mass. at 336. We concluded that
"[a]ssigning 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." Id.Contrary to Robinhood's assertions, the fiduciary duty rule
does not abrogate the common law. Instead, the rule, which has
the force of law, see Borden, Inc. v. Commissioner of Pub.
Health, 388 Mass. 707, 723, cert. denied sub nom. Formaldehyde
Inst., Inc. v. Frechette, 464 U.S. 936, (1983), is of equal
status to the common law, see Commonwealth v. Adams, 482 Mass.
514, 518 (2019). The Legislature can provide, and under MUSA
has provided, protections that may extend beyond those available
under the common law without abrogating the latter. In other
words, the rights and protections afforded under MUSA, including
31
those available under the fiduciary duty rule, stand shoulder-
to-shoulder with those under the common law.31 Thus, for
example, an investor injured by a breach of a fiduciary duty may
have a claim under the fact-intensive inquiry delineated in
Patsos, whereas the fiduciary duty rule provides a separate and
distinct regulatory tool to protect investors under MUSA.
This conclusion is not novel. We have previously
acknowledged that MUSA provides protections beyond -- without
overriding -- the common law. See, e.g., Bulldog Investors Gen.
Partnership v. Secretary of the Commonwealth, 457 Mass. 210, 220
(2010) (definition of term "offer" under MUSA "not limited to
its common-law definition"). See also Welch v. Barach, 84 Mass.
App. Ct. 113, 119-120 (2013) (MUSA misrepresentation claim does
not require two elements of common-law tortious
misrepresentation).32
31Indeed, the Legislature anticipated that MUSA's
protections would go beyond the common law. See, e.g., G. L.
c. 110A, § 401 (d) (for purposes of MUSA, "fraud," "deceit," and
"defraud" are "not limited to common-law deceit").
32The Legislature may craft statutory obligations that
exceed the common law, authorizing a State official or agency to
define the scope of those obligations. For example, G. L.
c. 93A "created new substantive rights by making conduct
unlawful which was not unlawful under the common law," such as
"[u]nfair and deceptive practices" beyond those "limited by
traditional tort and contract law requirements," Slaney v.
Westwood Auto, Inc., 366 Mass. 688, 693 (1975), quoting
Commonwealth v. DeCotis, 366 Mass. 234, 244 n.8 (1974), and
authorized the Attorney General to enforce the new protections,
32
d. Nondelegation doctrine. Robinhood also maintains that,
if MUSA permits the Secretary to promulgate the fiduciary duty
rule, as we conclude it does, then MUSA impermissibly delegates
legislative authority in violation of the separation of powers
doctrine embodied in article 30 of the Massachusetts Declaration
of Rights (art. 30).33 Article 30 "encompasses the general
principle that the Legislature cannot delegate the power to make
laws." Construction Indus. of Mass. v. Commissioner of Labor &
Indus., 406 Mass. 162, 171 (1989). "No formula exists for
determining whether a delegation of legislative authority is
'proper,'" Chelmsford Trailer Park, Inc. v. Chelmsford, 393
Mass. 186, 190 (1984), but three considerations are relevant:
"(1) Did the Legislature delegate the making of fundamental
policy decisions, rather than just the implementation of
legislatively determined policy; (2) does the act provide
adequate direction for implementation, either in the form
of statutory standards or . . . sufficient guidance to
including by promulgating rules to define the actions that
constitute "unfair or deceptive acts or practices in the conduct
of any trade or commerce," Slaney, supra at 694-695 & n.7,
quoting G. L. c. 93A, § 2. Likewise, G. L. c. 151B supplemented
protections available to employees under the common law and
authorized the Massachusetts Commission Against Discrimination
to make rules to that effect. See G. L. c. 151B § 3 (5). See
also Green v. Wyman-Gordon Co., 422 Mass. 551, 558 (1996) (G. L.
c. 151B claims are separate from common-law claims for
intentional and negligent infliction of emotional distress).
33Article 30 of the Massachusetts Declaration of Rights
provides, in relevant part, that "[i]n the government of this
[C]ommonwealth, . . . the executive shall never exercise the
legislative and judicial powers, or either of them: . . . to the
end it may be a government of laws and not of men."
33
enable it to do so; and (3) does the act provide safeguards
such that abuses of discretion can be controlled?"
Id. See Oracle USA, Inc. v. Commissioner of Revenue, 487 Mass.
518, 525 (2021), quoting Gundy v. United States, 139 S. Ct.
2116, 2123 (2019) ("Delegation is constitutional so long as the
legislative body provides an 'intelligible principle' to direct
the exercise of delegated authority"). We address each
consideration in turn.
First, MUSA sets forth the Legislature's fundamental policy
decision to protect investors, and more specifically to protect
them from "unethical or dishonest conduct or practices," G. L.
c. 110A, § 204 (a) (2) (G). Delegating the authority to define
the precise conduct or practices proscribed is not tantamount to
permitting the Secretary to determine fundamental policy
decisions. See, e.g., Commonwealth v. Clemmey, 447 Mass. 121,
136 (2006) (Legislature's "delegation of the definitions . . .
simply directed the [agency] to work out the details necessary
to the implementation of the policy"). Such a delegation
permissibly draws on the Secretary's expertise to adapt to the
real-world context of evolving practices in the securities
industry, including, as relevant here, the changes resulting
from broker-dealers increasingly choosing to give investment
advice and blurring the line that traditionally separated
broker-dealers from investment advisers, as delineated in part
34
2.a, supra. See, e.g., Clemmey, supra at 137 (delegation of
power to agency to define terms used in Wetlands Protection Act
agricultural exemption proper "because it ensured that the scope
of the agricultural exemption would be based on the application
of real-world farming practices").34
Second, the Secretary is not without guidance in defining
the proscribed practices. See Chelmsford Trailer Park, Inc.,
393 Mass. at 190. MUSA allows the Secretary to define such
conduct and practices only "insofar as the definitions are not
inconsistent with the provisions of [MUSA]," G. L. c. 110A,
§ 412 (a); regulations also must be "necessary or appropriate in
the public interest or for the protection of investors and
consistent with the purposes fairly intended by the policy and
provisions of [MUSA]." Id. § 412 (b). These provisions provide
an intelligible principle to direct the Secretary's exercise of
his authority. See, e.g., Clemmey, 447 Mass. at 137 (statute's
guidance sufficient where it generally specified concern for
land "owned and managed by farmers," jeopardy to "the future
economic viability of our farms," and "routine and long standing
34Accord United States vs. Levoff, U.S. Dist. Ct., No. 19-
cr-780 (D.N.J. Aug. 12, 2020) (SEC regulations outlawing insider
trading did not violate nondelegation doctrine because
Securities and Exchange Act of 1934 delegated power to SEC to
enact securities regulations toward goal of "insur[ing] the
maintenance of fair and honest markets in [securities]
transactions" [quotation and citation omitted]).
35
farm operations," and was amended from "land for agricultural
use" to "land in agricultural use" [emphasis added; citations
omitted]); Tri-Nel Mgt., Inc. v. Board of Health of Barnstable,
433 Mass. 217, 226 (2001) (statute's guidance sufficient where
it required "reasonable" regulations to "address the 'health' of
the community" [citations omitted]).
Third, MUSA provides safeguards such that any abuse of
discretion "can be controlled," see Chelmsford Trailer Park,
Inc., 393 Mass. at 190. Before promulgating regulations, the
Secretary must make findings that any rule promulgated pursuant
to MUSA is "necessary or appropriate in the public interest or
for the protection of investors and consistent with the purposes
fairly intended by the policy and provisions of [MUSA]." G. L.
c. 110A, § 412 (b). Entities subject to an administrative
action are entitled to notice and a hearing, G. L. c. 110A,
§ 305 (b), and may obtain judicial review of such actions, see
G. L. c. 30A, § 14; G. L. c. 110A, § 411 (a).35 See Clemmey, 447
35Robinhood mistakenly contends that permitting the
Secretary to define "unethical or dishonest conduct or
practices," G. L. c. 110A, § 204 (a) (2) (G), by reference to
the fiduciary duty rule, presents due process concerns in that
it renders MUSA "so standardless that it invites arbitrary
enforcement" (citation omitted), Beckles v. United States, 580
U.S. 256, 262 (2017). "A law is void for vagueness if persons
of common intelligence must necessarily guess at its meaning and
differ as to its application . . . or if it subjects people to
an unascertainable standard" (citation omitted). Commonwealth
v. Cassidy, 479 Mass. 527, 538, cert. denied, 139 S. Ct. 27636
Mass. at 138 ("the availability of judicial review" weighs in
favor of conclusion that law "sufficiently demarcate[s] the
boundaries of regulatory discretion" [citation omitted]).36
e. Conflict preemption. Robinhood alternatively argues
that the fiduciary duty rule is invalid under the doctrine of
conflict preemption, contending that the rule "stands as an
obstacle to the accomplishment and execution of the full
purposes and objectives of [the Federal government]," Marsh v.
Massachusetts Coastal R.R., 492 Mass. 641, 648 n.18 (2023),
quoting Sprietsma v. Mercury Marine, 537 U.S. 51, 64 (2002), as
those purposes and objectives are set forth in the SEC's
Regulation Best Interest. See Merck Sharp & Dohme Corp. v.
Albrecht, 139 S. Ct. 1668, 1679 (2019) (Federal regulation
issued pursuant to statutorily delegated authority can preempt
State law). Robinhood asserts that the SEC intended the
Regulation Best Interest to set a ceiling on broker-dealers'
(2018). Tellingly, the fiduciary duty rule essentially imposes
obligations already well understood by investment advisers. See
Section 913 study, supra at vi-vii (investment advisers are
subject to duties of loyalty and care).
36Our decision in Clemmey, 447 Mass. at 135-136, disposes
of Robinhood's concern that the Secretary's interpretation vests
him with the effective "authority to establish new crimes," see
G. L. c. 110A, § 409 (a). As we explained, the Legislature may,
with sufficient guardrails, delegate to an agency the definition
of criminal conduct; such a delegation does not violate due
process where "fair notice of the conduct proscribed has been
provided," Clemmey, supra at 136, as was provided here.
37
fiduciary obligations to preserve retail investor access to
investment options that, Robinhood predicts, may become
economically unfeasible for broker-dealers to continue to offer
if they must comply with the fiduciary duty rule.
i. Assumption against preemption. "[P]re-emption
fundamentally is a question of congressional intent." Geier v.
American Honda Motor Co., 529 U.S. 861, 884 (2000), quoting
English v. General Elec. Co., 496 U.S. 72, 78 (1990). Our
analysis "begins 'with the assumption that the historic police
powers of the States [are] not to be superseded by . . . Federal
Act unless that [is] the clear and manifest purpose of
Congress.'" Dunn v. Genzyme Corp., 486 Mass. 713, 718 (2021),
quoting Cipollone v. Liggett Group, Inc., 505 U.S. 504, 516
(1992).37 Because State securities laws, like MUSA, fall within
a field of "'traditional' [S]tate regulation," the assumption
guides our analysis. Oneok, Inc. v. Learjet, Inc., 575 U.S.
373, 374 (2015).
Moreover, where, as here, "coordinate[d] [S]tate and
[F]ederal efforts exist within a complementary administrative
framework, and in the pursuit of common purposes, the case for
37This assumption reflects that "the States are independent
sovereigns in our [F]ederal system," and is consistent with "the
historic primacy of [S]tate regulation of matters of health and
safety." Medtronic, Inc. v. Lohr, 518 U.S. 470, 485 (1996)
(plurality opinion).
38
[F]ederal pre-emption becomes a less persuasive one." New York
State Dep't of Social Servs. v. Dublino, 413 U.S. 405, 421
(1973). State and Federal schemes have existed side by side
since the Great Depression;38 and Congress repeatedly has
expressed its intent to preserve the States' role in regulating
securities.39 See Capital Research & Mgt. Co. v. Brown, 147 Cal.
App. 4th 58, 66 (2007) ("Congress intended to preserve the
[S]tates' anti-fraud authority to control the conduct of brokers
and dealers"). In this context, a party asserting conflict
preemption bears a heavy burden to demonstrate "evidence of
conflict, and not merely with unsupported pronouncements as to
[Federal] policy" (quotation and citation omitted). Roberts v.
Southwestern Bell Mobile Sys., Inc., 429 Mass. 478, 491 (1999).
38"Securities regulation has existed, in one form or
another, since the mid-1800s," and "[b]efore the Great
Depression, securities were regulated almost exclusively by the
[S]tates." Lindeen v. Securities & Exch. Comm'n, 825 F.3d 646,
648-649 (D.C. Cir. 2016). "[B]eginning with Kansas in 1911,
many states imposed comprehensive securities regulation regimes
. . . [k]nown as 'blue-sky' laws." Id. at 649. During the
Great Depression, Congress began regulating securities at the
Federal level, enacting the Securities Act of 1933, 15 U.S.C.
§§ 77a-77aa, and thereafter the Securities Exchange Act of 1934,
15 U.S.C. §§ 78a-78pp, which created the SEC. See Lindeen,
supra.39See, e.g., 15 U.S.C. § 77r(c)(1) (preempting State
securities registration and qualification regimes for some
offerings but specifying that States "retain jurisdiction . . .
to investigate and bring enforcement actions, [in connection
with securities or securities transactions]" with respect to
"fraud or deceit" or "unlawful conduct by a broker").
39
See Chamber of Commerce of the U.S. v. Whiting, 563 U.S. 582,
607 (2011) ("a high threshold must be met if a [S]tate law is to
be preempted for conflicting with the purposes of a [F]ederal
[a]ct" [citation omitted]). Only "affirmative evidence that
Congress . . . had a ceiling-setting -- and thus obstacle-
preemption-creating -- intent" will suffice. Capron v. Office
of the Attorney Gen. of Mass., 944 F.3d 9, 28 (1st Cir. 2019),
cert. denied, 141 S. Ct. 150 (2020).
Here, Robinhood's preemption argument is "particularly
weak" because Congress and the SEC were aware of State laws
imposing fiduciary obligations on broker-dealers and declined to
express an intent to preempt those laws. See Wyeth v. Levine,
555 U.S. 555, 575 (2009) ("The case for [F]ederal preemption is
particularly weak where [the Federal government] has indicated
its awareness of the operation of [S]tate law in a field of
[F]ederal interest, and has nonetheless decided to stand by both
concepts and to tolerate whatever tension there [is] between
them" [citation omitted]). When it enacted Dodd-Frank with the
purpose "to protect consumers from abusive financial services
practices," Dodd-Frank preamble, 124 Stat. at 1376, Congress
instructed the SEC to look to the "legal or regulatory standards
of State securities regulators and other regulators intended to
protect retail customers," as models for the agency's own
efforts to derive a new standard for broker-dealers. See Dodd-
40
Frank § 913(c)(8), 124 Stat. at 1826. The SEC did so,40 and in
adopting the Regulation Best Interest, the SEC observed that
"[s]ome [S]tates provide through statute or regulation, among
other requirements . . . that broker-dealers have some form of
[S]tate-specific fiduciary duty to their customers in at least
some circumstances," 84 Fed. Reg. at 33,419,41 and "courts
40See Section 913 study, supra at 91 ("many [S]tates
require broker-dealers and their agents to observe high
standards of commercial honor and just and equitable principles
of trade in the conduct of business, and/or prohibit a variety
of enumerated unethical or fraudulent practices").
41For example, the State of Nevada "passed a law in 2017
that imposes a fiduciary duty on broker-dealers, sales
representatives, and investment advisers who give investment
advice." University of Miami School of Law, Comment Letter on
"Regulation Best Interest" Proposal, Nos. S7-07-18, 34-38062,
and S7-08-18, 34-83063, at 8 (Aug. 2, 2018), https://www.sec.gov
/comments/s7-07-18/s70718-4171732-172295.pdf [https://perma.cc/
7WFL-RVTT], citing Nev. Rev. Stat. § 90.575. The Nevada
Secretary of State proposed regulations pursuant to the Nevada
law in January 2019 that would provide that "[a] broker-dealer
or a sales representative who provides investment advice to
clients, manages assets, performs discretionary trading,
utilizes a title or term set forth [in the regulations, e.g.,
'adviser' or 'financial planner'], or who otherwise establishes
a fiduciary relationship with clients, owes a fiduciary duty to
their clients." State of Nevada, Office of the Secretary of
State, Notice of Draft Regulations and Request for Comment 3, 5-
6 (Jan. 18, 2019). The proposed regulations have not yet been
implemented. Note, Why Robinhood is Not a Fiduciary, supra at
1457 n.59.
"A number of other [S]tates have passed or [were]
considering similar legislation." University of Miami School of
Law, supra at 8, citing Knebel, States Look to Help Investors,
With Fiduciary Rules in Flux, Bloomberg News (Feb. 7, 2018),
https://news.bloomberglaw.com/legal-ethics/states-look-to-help-
41
interpreting [S]tate common law have imposed fiduciary
obligations on broker-dealers in certain circumstances," 84 Fed.
Reg. at 33,333 n.137. See Finke & Langdon, The Impact of the
Broker-Dealer Fiduciary Standard on Financial Advice, 25 J. Fin.
Planning 28, 34 (July 2012) ("There are four [S]tates that apply
a strict fiduciary standard [to broker-dealers and others] that
apply a limited fiduciary standard").42
investors-with-fiduciary-rule-in-flux-1? [https://perma.cc/4LKC-
8KBG].
42California, Missouri, South Carolina, and South Dakota
each apply a strict fiduciary standard to broker-dealers. See
Finke & Langdon, supra at 32. See also Davis v. Merrill Lynch,
Pierce, Fenner & Smith, Inc., 906 F.2d 1206, 1215 (8th Cir.
1990) (South Dakota common law imposes fiduciary duties of
"utmost good faith, integrity[,] and loyalty" on broker-dealers
[citation omitted]); Apollo Capital Fund LLC v. Roth Capital
Partners, LLC, 158 Cal. App. 4th 226, 246 (2007) ("[T]he
relationship between any stockbroker and his or her customer is
fiduciary in nature, imposing on the former the duty to act in
the highest good faith toward the customer" [citation omitted]);
State ex rel. PaineWebber, Inc. v. Voorhees, 891 S.W.2d 126, 130
(Mo. 1995) ("In Missouri, stockbrokers owe customers a fiduciary
duty[, which] includes at least these obligations: to manage
the account as dictated by the customer's needs and objectives,
to inform of risks in particular investments, to refrain from
self-dealing, to follow order instructions, to disclose any
self-interest, to stay abreast of market changes, and to explain
strategies" [citation omitted]); Cowburn v. Leventis, 366 S.C.
20, 37-38 (Ct. App. 2005) ("A broker or dealer of securities is
an agent of the buyer, and therefore, generally owes the buyer
fiduciary duties . . . [often including the duty] to refrain
from acting adversely to the buyer[']s interest, to avoid
engaging in fraudulent conduct, and to communicate any
information he or she may acquire that would be to the buyer[']s
advantage").
42
In promulgating the Regulation Best Interest, the SEC
"recognize[d] that there is substantial variation in the
sources, scope, and application of [S]tate fiduciary law." 84
Fed. Reg. at 33,435.43 Yet the SEC declined to indicate whether,
in its perspective, the Regulation Best Interest preempted State
laws, as some commenters urged it to do, stating that it could
not "analyze the economic effects of the possible preemption of
[S]tate law at [that] point because the factors that [would]
shape those judicial determinations [were] too speculative." 84
Fed. Reg. at 33,435 n.1163.
ii. Regulation Best Interest sets a floor. Against this
backdrop, Robinhood's theory of conflict preemption is grounded
"States that impose a limited fiduciary duty include
Delaware, Florida, Georgia, Illinois, Kansas, Louisiana,
Maryland, Michigan, Ohio, Pennsylvania, Tennessee, and Texas."
Finke & Langdon, supra at 33. See, e.g., O'Malley v. Boris, 742
A.2d 845, 849 (Del. 1999) (broker-dealers have "fiduciary duties
of good faith, fair dealing, and loyalty" to customers). See
also Wallace v. Hinkle N.W., Inc., 79 Or. App. 177, 181 (1985)
("A stockbroker is a fiduciary if his client trusts him to
manage and control the client's account and he accepts that
responsibility").
43The SEC acknowledged that broker-dealers in States that
already imposed fiduciary standards on them might reap cost
benefits with Regulation Best Interest because "they may already
engage in practices under the baseline that overlap with certain
requirements under [the] Regulation Best Interest," 84 Fed. Reg.
at 33,435, and also that "costs and benefits that arise from
obligations under Regulation Best Interest that differ from
obligations under [S]tate law, such as the Conflict of Interest
Obligation, will be maintained." Id.
43
in the SEC's decision not to impose a uniform fiduciary duty
standard, as well as the SEC's statement that
"Regulation Best Interest . . . balances the concerns of
the various commenters in a way that will best achieve the
Commission's important goals of enhancing retail investor
protection and decision making, while preserving, to the
extent possible, retail investor access (in terms of choice
and cost) to differing types of investment services and
products" (emphasis added).
84 Fed. Reg. at 33,323. We disagree that this aspiration to
preserve investor access to an array of investor services "to
the extent possible" hurdles the high bar required to find
conflict preemption. See Kansas v. Garcia, 140 S. Ct. 791, 801
(2020) (cautioning against "[i]nvoking some brooding [F]ederal
interest" as basis for conflict preemption [citation omitted]).
Indeed, although the SEC mentioned one short-lived experiment to
suggest that a higher fiduciary obligation might cause broker-
dealers to pass along increased costs to customers or to alter
their existing offerings,44 the SEC declined invitations to
44In particular, the Department of Labor had promulgated
regulations pursuant to the Employee Retirement Income Security
Act of 1974, Pub. L. No. 93-406, 88 Stat. 829, codified as
amended at 29 U.S.C. §§ 1001 et seq. (ERISA), through which most
broker-dealers would be deemed fiduciaries when they provided
recommendations to retirement plan investors. 29 C.F.R.
§ 2510.3–21(a)(2)(iii), (d) (2017) (DOL Fiduciary Rule),
repealed in part by 85 Fed. Reg. 40589 (July 7, 2020). The SEC
explained that "the full effects of the DOL Fiduciary Rule were
not realized as it was vacated during the transition period,"
stating only that "a number of industry studies indicated that,
as a result of the DOL Fiduciary Rule, industry participants had
already or were planning to alter services and products
44
assess any preemptive effects of the Regulation Best Interest on
State regulations as "too speculative." 84 Fed. Reg. at 33,325
& n.61, 33,435 n.1163.
The Supreme Court's decision in Williamson v. Mazda Motor
of Am., Inc., 562 U.S. 323, 332 (2011), is instructive. There,
the Supreme Court considered whether a State tort claim, which
would effectively require lap-and-shoulder belts in the rear
middle seat of cars, was preempted because it ostensibly
presented a conflict with a Federal safety regulation that, for
cost-savings reasons, gave manufacturers a choice as to the type
of restraint system to install in the rear seat. Id. at 326.
The Court determined that the State tort action was not
preempted because cost savings was not a "significant regulatory
objective." Id. at 332. The Supreme Court reasoned that
"to infer from the mere existence of such a cost-
effectiveness judgment that the [F]ederal agency intend[ed]
to bar States from imposing stricter standards would treat
all such [F]ederal standards as if they were maximum
standards, eliminating the possibility that the [F]ederal
agency [sought] only to set forth a minimum standard
potentially supplemented through [S]tate tort law."
available to retail customers." 84 Fed. Reg. at 33,322 & n.33.
See id. at 33,322 n.34 ("It was widely reported that a number of
firms responded to the DOL Fiduciary Rule by either requiring
customers to enter into more expensive advice relationships or
by passing through higher compliance costs to customers, which
altered many retail customer relationships with their financial
professionals").
45
Id. at 336.45
Like the hoped-for cost savings in Williamson, the SEC's
wish to "preserv[e], to the extent possible, retail investor
access" to a variety of investment services and products, 84
45 Critically, the Supreme Court distinguished this cost-
saving aspirational goal from the purposes at issue in a prior
iteration of the same Federal safety regulation, which the Court
had considered in Geier, a case upon which Robinhood rests its
preemption argument. Williamson, 562 U.S. at 336. Geier
concerned whether a State tort claim that effectively would
require airbags was preempted by a Federal regulation allowing
manufacturers a choice to install a variety and mix of passive
restraint systems. See Geier, 529 U.S. at 881. The Federal
agency had concluded that permitting a mix of devices "would
help develop data on comparative effectiveness, would allow the
industry time to overcome the safety problems and the high
production costs associated with airbags, and would facilitate
the development of alternative, cheaper, and safer passive
restraint systems," and "would thereby build public confidence"
through a "gradual phase-in" of passive restraint systems. Id.
at 879. The resulting Federal regulation "embodie[d] the
[agency's] policy judgment that safety would best be promoted if
manufacturers installed alternative protection systems in their
fleets rather than one particular system in every car." Id. at
881. The Federal policy to promote safety in vehicles would
have been undermined by a State claim holding manufacturers
liable for their failure to install airbags. Id. The Court in
Williamson distinguished the Federal agency's determination in
Geier, where the "regulation's history, the agency's
contemporaneous explanation, and its consistently held
interpretive views indicated that the regulation sought to
maintain manufacturer choice in order to further significant
regulatory objectives" (emphasis added), i.e., enhancing safety,
from the agency's determination in Williamson to permit
manufacturers to choose either lap or lap-and-shoulder belts for
rear middle seats for cost-savings reasons. Williamson, supra
at 336.
46
Fed. Reg. at 33,323,46 does not preclude the Secretary from
imposing a higher duty on broker-dealers that provide investment
advice. As both Congress and the SEC have made clear, the
central "purposes and objectives," Marsh, 492 Mass. at 648 n.18,
quoting Sprietsma, 537 U.S. at 64, of Federal law as it pertains
to broker-dealer standards are to improve investor protection.
See Dodd-Frank preamble, 124 Stat. at 1376; 84 Fed. Reg. at
33,323. Against the backdrop of a long history of State
regulations of broker-dealer standards existing alongside
Federal regulations, including States imposing fiduciary duties
on broker-dealers; a congressional record encouraging the SEC to
consider imposing a uniform fiduciary duty standard; the Section
913 study advising the same; and the SEC's conclusion in its
adopting release that a preemption analysis would be too
speculative, we conclude that the Regulation Best Interest
constitutes a regulatory floor that does not foreclose State
regulation to more clearly protect investors. See Williamson,
562 U.S. at 335. See also Mobil Oil Corp. v. Attorney Gen., 361
Mass. 401, 410 (1972) (Federal rule was best understood as
46See, e.g., 84 Fed. Reg. 33,322 ("subject[ing] broker-
dealers to a wholesale and complete application of the existing
fiduciary standard under the [Investment] Advisers Act . . .
would significantly reduce retail investor access to differing
types of investment services and products, reduce retail
investor choice in how to pay for those products and services,
and increase costs for retail investors of obtaining investment
recommendations").
47
regulatory floor to State rule without any "clear indication
that the States were to be precluded from legislating in [the]
area"). Robinhood has not met its high burden to demonstrate
otherwise. See Roberts, 429 Mass. at 491.
4. Conclusion. The Superior Court judgment is reversed,
and the matter is remanded for further proceedings consistent
with this opinion.47
So ordered.
47Because we address only the legal questions presented by
the parties, we remand the case to the Superior Court for
consideration of any fact-dependent issues that may remain.