Massachusetts regulator to revive case against Robinhood
On Wednesday, a Massachusetts court heard arguments regarding the revival of a state fiduciary duty rule that was central to an enforcement action against the no-fee app Robinhood.
Robinhood is facing an investigation at the hands of Massachusetts securities regulators over alleged failures to protect inexperienced investors while aggressively promoting its products to them.
In response to the allegations, a Robinhood spokesperson said: ‘We disagree with the allegations in the complaint by the Massachusetts Securities Division and intend to defend the company vigorously.’
According to the enforcement arm of the Massachusetts Securities Division, the app-based platform is alleged to have failed in its duty to stop frequent outages and disruptions on its trading platform. This was in addition to employing aggressive marketing tactics to draw inexperienced traders, including the use of “gamification methods to control clients.”
According to its own calculations, 68% of Massachusetts-based Robinhood customers had been authorised to trade options even after reporting limited or no investing expertise.
In December 2020, the Secretary of the Commonwealth of Massachusetts, William Galvin, filed a lawsuit against Robinhood, accusing the popular online trading platform of aggressively marketing to inexperienced investors and exposing them to unnecessary risks. The lawsuit also alleged that Robinhood had failed to adequately screen its customers for eligibility to trade options.
However, a Superior Court judge has sided with Robinhood in the lawsuit filed by Galvin. The judge ruled that the secretary did not have the authority to pursue the lawsuit, as the allegations fell under the jurisdiction of the Securities and Exchange Commission (SEC).
The ruling was a significant victory for Robinhood, which has faced a number of legal challenges in recent years. The company has been accused of misleading customers about its business practices and exposing them to unnecessary risks, and has faced a number of regulatory investigations as a result.
Despite the ruling in its favor, Robinhood continues to face scrutiny from regulators and lawmakers. The company has pledged to work with regulators to address concerns about its business practices, and has made a number of changes to its platform in recent months in response to regulatory pressure.
“Secretary Galvin feels strongly in the need to apply fiduciary duty standards to financial professionals. The Robinhood case is the perfect example of the need for such a rule in Massachusetts,” a spokesperson said.
The ruling in the lawsuit filed by Galvin is a positive development for Robinhood, as it clears the way for the company to continue operating in Massachusetts without facing legal action.
Earlier in April, the North American Securities Administrators Association (NASAA) has issued a $10.2 million penalty against Robinhood over poor communications with its customers and trading outages on its platform in 2020.
