States Line up Behind Mass. Regulators in Targeting Robinhood
More state securities regulators may join their Massachusetts peers in deeming Robinhood Financial to have enforceable fiduciary obligations to its customers, according to a panel discussion Monday sponsored by North American Administrators Securities Association, that included officials from Ohio and Montana.
The Massachusetts securities regulator got the go ahead from a court in May to continue its pending lawsuit aimed at enforcing a fiduciary standard of care against Robinhood. If the state prevails in the case, Robinhood would have to disgorge profits, pay fines, and alter its business strategy in Massachusetts.
Panel participants at the hybrid in-person and online event discussed at length the reasons why such a pursuit made sense for regulators and why some discount online brokerages might be classified as offering investment advice. The discussion came after the SEC last month issued a request for comment on digital engagement tools used by online platforms.
Without mentioning Robinhood by name, Andrea Seidt, the Ohio Securities Commissioner with the Ohio Department of Commerce, Division of Securities, said sell-directed, or DIY platforms may be hanging unsophisticated investors “out to dry” by “using technology as a basis for evading their duties of care.”
Seidt, who serves as chair of NASAA’s Regulation Best Interest Implementation Committee, served as the moderator for the NASAA-sponsored panel called, “The Many Faces of Today’s Investor–One Size Doesn’t Fit All.” The panel coincidentally took place on a day that the S&P 500 fell 1.70% in its worst day since May.
Self-directed brokerages may also cross over into advice if they are “designed” to encourage day trading, which “is an investing strategy,” Seidt said. She said regulators are conducting studies of whether designs promote day trading to help inform whether platforms should be subject to fiduciary standards, or the Securities and Exchange Commission’s Best Interest Regulations, which applies to brokerage accounts.
Self-directed platforms have argued that those unsophisticated investors “just need to be educated. And once you educate them, then that’s going to solve all the problems,” Seidt said.
But, she asked, don’t broker-dealers “have an obligation” to warn customers about the potential losses “instead of throwing confetti at them?”
A spokesperson for Robinhood, which removed the confetti feature from its platform, said that the company disagrees with the characterization that it is offering any investment recommendations.
“Applying Regulation Best Interest to self-directed trading platforms like Robinhood would be inconsistent with a fundamental premise of the rule, namely that it does not apply to self-directed or otherwise unsolicited transactions by a retail customer,” the Robinhood spokesman wrote in an email.
In a statement on April 15, after Massachusetts filed its lawsuit, Robinhood had said that its customers are more sophisticated than the state presumed.
“We don’t believe our customers are naive as the Massachusetts Securities Division paints them to be,” the company wrote. “Showing a list of companies in a certain sector is not a recommendation. Giving people information about the movement of the stocks they own or watch is not a recommendation.”
The question of what duties and responsibilities are held by a self-directed brokerage is “thorny,” Bryan Lantagne, the former Commissioner, Massachusetts Securities Division, who retired in 2018, told the NASAA conference’s audience.
A self-directed platform with attributes like gamification, induced trading and featured listings takes the broker out of the “execution only” role and moves that broker to a full service role “where advice is being offered,” he said.
“The problem is that these firms are blurring the distinction between the true, execution-only discount platform, and the full service platform,” Lantagne added.
William Birdthistle, a professor at the Illinois Institute of Technology’s Chicago Kent Law School, offered the municipal transportation sector and Uber Technologies as a cautionary tale for the state regulators showing that they may become too popular to corral.
“[Uber] broke a lot of things, and they moved in real time,” he said. “This to me feels very similar, like a repeat. Kids love it, everybody uses it. How can you object? How can you stand in the way of this innovative progress? That’s a lesson that we should pay very close attention to.”