-: SJC-13381,
Robinhood Financial LLC v. Secretary of the Commonwealth.
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Justice Gaziano: Attorney Fisher Groban.
-: Thank you, Your Honor.
Good morning Your Honors'
and may it please the Court.
Assistant Attorney General Phoebe Fischer-Groban
on behalf of the Secretary of the Commonwealth
and the Massachusetts Securities Division.
The Massachusetts legislature,
granted the secretary the authority
to protect vulnerable investors in the Commonwealth
by defining what unethical conduct means
under the Massachusetts Uniform Securities Act.
The secretary's fiduciary duty rule
protects consumers by requiring
that when they receive investment advice
or recommendations from a financial professional,
that that advice is provided to them
without a conflict of interest.
And this rule is-
-: So that fiduciary rule was proposed by
the secretary to the SEC and the SEC rejected it.
Why is it they're not a conflict preemption?
-: Your Honor, there is not preemption here
because for preemption purposes,
we look to what Congress's purposes and objectives are.
And here in Dodd-Frank, which is the statute
that authorized regulation best interest,
which was ultimately promulgated by the SEC,
Congress's first, its intent was to protect investors
and second, in the statute
authorizing the SEC to engage in rulemaking,
it specifically authorized the SEC
to do exactly what Massachusetts has done here.
And so Robinhood's burden
and it bears a heavy burden to establish preemption,
is to show that that somehow what Massachusetts has done
and the fiduciary duty rule stands
as an obstacle to the purposes and objectives of Congress.
But here, Massachusetts has done
what Congress told the SEC that it could do in Dodd-Frank.
-: Well, when we do the preemption,
do we look at what Congress
authorizing scope to the SEC was,
or do we look at the SEC's rulemaking?
-: We look at Congress's purposes and objectives
and the Supreme Court has repeatedly emphasized
and recently reiterated that what's important here
and the touchstone is congressional intent
and congressional purposes and objectives.
So here, the congressional purposes and objectives
are in Dodd-Frank, of course, to protect investors,
which the fiduciary duty rule does.
And Congress also authorized the SEC
to do precisely what Massachusetts has done,
which is to promulgate a rule
that requires that when providing investment advice
to retail investors, that broker dealers
hold themselves to the same standard of care,
only with respect to that function, as investment advisors.
So what Massachusetts has done
is completely consistent
with congressional purposes and objectives.
-: Isn't the statute though, suggest in 13B
that well, we are not going to resolve
this preemption issue, we'll see what happens?
-: Well, in it.
Justice Lowy: Pursuant to the study.
-: In its regulatory, Your Honor,
to make sure I'm understanding your question,
are you referring to the regulatory,
the SEC's regulatory record?
Justice Lowy: Right.
-: Yes, so the SEC did of course say
that it said nothing about preemption
and it said if and when there's litigation,
we can address it then.
But what's important here is that the SEC's record
doesn't express anything indicating
that it understood Congress's intent was to set a ceiling.
And it's also important to note
that in the SEC's regulatory record,
they acknowledged the fact that many states at common law
already hold broker dealers to a higher standard of care.
So the SEC-
Judge Gaziano: Not this state.
-: Pardon me?
-: Not this state.
-: Well, Your Honor, I'm glad you asked that
because I believe you're asking about the-
-: Please finish Justice Lowy's question.
-: Sure.
To finish the answer to your question,
here the SEC acknowledged that states
impose a higher duty of care on broker dealers.
It expressed no discomfort with that fact,
but acknowledged it.
But what's most important here
is congressional purposes and objectives.
And the SEC's regulatory record
is absolutely silent about the notion
that Congress, by authorizing its rulemaking,
would've intended if in the situation which happened here,
where the SEC imposed something
lower than a fiduciary duty of care,
that that would now be the ceiling
for all broker dealer fiduciary duties.
-: The question I have is,
can the Secretary of State by regulation overrule Patsos?
-: I have two answers to that question.
And the first is, is that the Secretary of State
didn't overrule Patsos and here's why.
And there's two reasons why.
The first is Patsos is about discretionary accounts.
In Patsos, the court was deciding
whether when a broker dealer has taken on discretion
with respect to an investor's account,
that broker dealer owes a general or ongoing fiduciary duty.
Here, the fiduciary duty rule
doesn't impose an ongoing fiduciary duty on broker dealers.
Rather, it says, when you engage in the function
of providing investment advice or recommendation
and only with respect to that conduct,
you owe the customer a fiduciary duty,
which means you need to comply with a duty of care
and you need to comply with a duty of loyalty,
which means you can't have a conflict of interest.
Patsos, in fact, said really only one thing
about the situation that the fiduciary duty rule addresses,
which is non-discretionary accounts, again,
where the broker dealer is not affecting transactions
without getting the approval of the customer.
And it said, for non-discretionary accounts,
each transaction is viewed singly,
the broker is bound to act in the customer's interest
when transacting business for the account,
but all duties to the customers cease
when the transaction is closed.
And the fiduciary duty rule is consistent with that.
So the fiduciary duty rule is consistent with Patsos,
but secondarily, it doesn't override
or abrogate Patsos in any way.
And that's because a common law breach
of fiduciary duty claim still exists for an investor.
An investor can still bring
a breach of common law fiduciary duty claim
against a broker dealer,
that would be analyzed under Patsos,
the Uniform Securities Act, the fiduciary duty rule
would not come into play.
The fiduciary duty rule can be enforced by the secretary
and not an investor.
So the fiduciary duty rule
hasn't abrogated the common law breach
of fiduciary duty claim,
which is still available for retail investors
who wish to bring one against their broker dealer.
-: To go to something you said, jumped over pretty quickly,
which was the definitions,
because I think what one of the issues here,
that Robinhood has, is that,
not in the constitutional sense,
but that they have that too as separation of powers,
but that the delegation here
just does not allow for this regulation,
that the statute doesn't provide the delegation
that the secretary has taken,
specifically as it relates to the definitions
of dishonest and unethical.
Can you address that.
-: Your Honor, the secretary's definition
of unethical conduct to include
when a broker dealer provides advice
with the burden of a conflict of interest
is a reasonable interpretation of that term.
And the Massachusetts legislature specifically authorized,
you know, it's set forth a legislative purpose,
which is to protect investors.
And then it's set forth a standard,
which is unethical or dishonest conduct,
which the secretary is empowered to enforce
and to promulgate detailed definitions
explaining what unethical conduct looks like
in Massachusetts.
-: How do we measure that?
How do we know what is a reasonable definition
of unethical conduct?
Because the opposing party
says it has to be based on industry standards.
-: The opposing party's argument
that the what is unethical is based on industry standards,
finds absolutely no support
in the text of the statutes itself, which is-
-: Well, they point to some black flog definitions,
which seems persuasive.
-: The definition of the term unethical
is granted to the secretary.
And here the statute itself,
the plain language of unethical,
it is a reasonable interpretation of unethical
to include acting with a conflict of interest.
If unethical can't include conflicts of interest,
I mean, that gets to the core of unethical conduct.
And here the statute authorizes the secretary
and not the broker dealer industry
to say what unethical conduct is here.
And helpfully here, regulation best interest,
we cited this in our brief,
regulation best interest for example,
recent SEC bulletins have explained
that under regulation best interest
and a fiduciary duty standard of care,
the results are kind of the same, which is, well.
-: That was my next question is what's the difference?
-: Sure, I'm glad you asked that.
These SEC bulletins make clear
that the real difference comes in,
in the conflict of interest piece.
The SEC has made clear that under regulation best interest
and under fiduciary duty,
the standard of the duty of care looks similar,
which is to say a broker dealer
still needs to make an inquiry about the details
of the recommendation they're making,
and they need to know things about the investor
they're making the recommendation to.
-: Okay, so what are the differences?
-: The difference comes in,
in the conflict of interest piece,
which is to say the fiduciary duty rule
requires a broker dealer to seek,
to avoid conflicts of interest.
If they can't be reasonably avoided,
to eliminate those conflicts of interest.
And if they can't be reasonably eliminated,
to mitigate those conflicts of interest.
Whereas under regulation best interest,
it appears that merely disclosing conflicts of interest
can be enough and the secretary, in his regulatory record
cited compelling evidence that disclosures aren't enough
to protect retail investors.
They don't understand what they mean
and they don't understand
that when a broker dealer is providing them
with an investment advice,
that that broker dealer may be doing so
because of a sales contest.
In other words, that that recommendation
may be burdened by a financial interest
of the broker dealers.
And so that's the key difference between regulation,
best interest and the fiduciary duty rule,
which is to say, regulation best interest
may be satisfied potentially by merely disclosing conflict,
whereas the disclosure of the fiduciary duty rule
says the broker dealers should attempt to avoid, eliminate
or mitigate those conflicts.
And another key difference
is that the regulation best interest
appears to permit kind of broader based sales contests.
I believe the words they use
are limited time sales contests.
So the fiduciary duty rule
says no sales contests are permissible,
because of course that could introduce the potential
for a conflict of interest.
-: Well, investor protection,
you keep on saying investor protection
and if I were there, I would as well
and with good reason as far as being a purpose here.
But it's not the only purpose here.
There's also concerns when you look at the SEC,
at least about investor choice and the Uniform Act.
Uniform Act has concerns about some consistency
throughout the country
and that's been raised by Robinhood as well.
How do you address whether or not this is a,
these regulations are permissible delegation
considering that those are also purposes at play?
-: Your Honor, the drafters commentary for section 415,
which is the provision that encourages uniformity.
412B, that uniformity provision
only applies to certain ministerial things,
so it doesn't apply here.
But 415, which discusses uniformity,
the drafters commentary makes clear
that uniformity is not required.
And so the secretary's promulgation of a rule
that is the first of the other states
that have uniform acts does not mean that that rule
is ultra vires of the statute
or beyond the secretary's authority
because the drafters commentary
specifically speaks to this situation,
which is where a securities regulator
sets an administrative precedent and other states can,
but are not required to follow
that administrative precedent.
And so while the statute encourages uniformity,
the drafters commentary makes clear
that that's only a secondary aim of the statute
and only insofar as practical.
Justice Lowy: Investor's choice?
-: Investor choice is not a purpose of the statute,
investor choice is discussed by the SEC in its rulemaking
associated with regulation best interest.
But that's not a purpose
of the Massachusetts Uniform Securities Act.
And investors-
-: I do wanna address the question, you know,
raised or I guess the point raised by Robinhood
that structurally the MUSA is, you know,
treats broker dealers different than investment advisors
and so this particular rule is ultra vires
because it's treating both the same.
-: This rule does not treat investment advisors
and broker dealers the same.
It respects their traditional distinction and here's why.
Broker dealers traditionally,
as Robinhood emphasizes in its brief,
merely effectuate securities transactions.
Investment advisors-
-: You're saying when brokers dealers
dip their toe into providing some sort of advice,
be it a list or, you know,
encouraging repeated transactions,
then they are outside of their traditional zone
and so should be treated more like investment advisors.
-: Yes and-
-: And that that's a reasonable interpretation
by the secretary.
-: Yes and while broker dealers,
they are permitted to give advice
that's incidental to their traditional role
in affecting securities transactions.
The secretary in his rule making recognized that
and the amicus briefs in this case
are helpful on in this point too
and recited it that increasingly
broker dealers are providing investment advice
and recommendations and holding themselves out
as trusted advisors.
So what the fiduciary duty rule does is
it doesn't fundamentally change the relationship
between a broker dealer and its customer,
the traditional relationship.
What it says is, if you're gonna provide
investment advice or recommendations,
your client, the investor
is entitled to have advice
that is made in their best interest
and that is not conflicted.
And so it applies to the function of providing advice,
but keeps these two relationships
that are recognized in the act intact.
-: Any other questions?
Thank you, counsel.
-: Oh, thank you.
-: Counsel how are you?
-: Good morning and may it please the court,
Amy Saharia for appellee Robinhood Financial.
This court should affirm their Superior Court's ruling
that the fiduciary duty rule
exceeds the secretary's authority
under the Massachusetts Uniform Securities Act.
The act 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.
The secretary's contrary and limitless reading of the act
defies the plain meaning of the word unethical.
It conflicts with the act's history,
structure and purpose and it-
-: But why is it unreasonable to say
that unethical includes situations
where you do not avoid a conflict of interest
do not eliminate that conflict of interest
or you do not mitigate it, why is that unreasonable?
-: Because the entire premise of the broker dealer model
is that broker dealers have a conflict of interest
when they execute a transaction on a transaction
by a transaction basis because-
-: Right but when they dip their toe
into starting to give advice, why can't we treat them,
why is it unreasonable for the secretary
to treat them more like an investment advisor
and require them on this conflict of interest point
to avoid them, eliminate them or mitigate them?
-: Sure, let me give two responses.
So first, the law has recognized, both federal law,
the federal securities laws,
as well as the Massachusetts Act,
that broker dealers can give recommendations
incidental to their broker dealer duties
and they're still a broker dealer
as long as they are not being compensated
as an investment advisor.
So that change in the law by the secretary
is a change in the law
as it relates to broker dealers making recommendations.
Now, turning to the common law,
this court has recognized for a century,
going all the way back to Brown versus Corey,
which we've cited, that broker dealers
do not owe fiduciary duties to customers
unless they're exercising discretion and control,
unless there are special circumstances,
even when in the language of Brown v. Corey,
the customer is relying on the expertise
and knowledge of the broker dealer.
-: And so the investor doesn't have a cause of action
under the common law, but why can't the secretary hold,
you know, clients like Robinhood
to a higher standard under the Uniform Act?
-: Sure, because this court
has long held that the legislature is not presumed
to have altered or abrogated the common law,
absent and expressed.
-: Well no, there's no abrogation of the common law.
The investor still has the claims
that he or she would've had under Patsos.
It's just that the secretary now
can bring in action for unethical conduct,
revoking somebody's license
to practice in Massachusetts
and to offer their securities when they act unethically
as the secretary has defined it.
Why is that unreasonable?
-: That is an abrogation of the common law
as it relates to the broker dealer
because the broker dealer now has no choice
but to comply with the fiduciary duty
as the secretary has enacted it.
The common law does the broker dealer no good
in that circumstance.
But I think the key point here
is that this court needs to-
-: So you're saying that the common law
was to protect the broker dealer
and the broker dealer's rights under Patsos
have been violated by the secretary's redefinition
of unethical?
-: Well, the common law exists
not only for the protection of investors,
but also for the protection of broker dealers.
It provided clear rules to broker dealers
and I think the issue here-
-: But this rule is clear.
-: This rule is clear
and we think it clearly violates Patsos.
And I mean, there are aspects of the rule
that are not clear.
The parties very much dispute
whether Robinhood even provides recommendations.
But that's not an issue for this court,
that would be an issue for the administrative proceedings.
But the issue here is that,
we are defining the words unethical and dishonest
for purposes of the act
and the secretary has given those words
no independent meaning in the act.
As I take his reply brief
and as I take his argument here today,
he can give those words any meaning he wants.
-: But again, that's not the case
that we have here right now, right?
Your argument is about defining unethical and dishonest
to include the fiduciary due to rule.
-: That's correct.
-: Okay so it's not, you know,
this question about the sky is falling,
the secretary, can, you know, say, you know,
wearing blue is unethical.
I mean, that's just not what the case we have here.
We have a specific rule and the question is,
is that a reasonable interpretation of what's unethical?
-: Sure and we think this rule falls far outside
what is a reasonable definition of unethical.
Because number one, it conflicts
with the SEC's rule,
number two, it conflicts with the common law
and number three, the secretary has pointed to no authority
outside the state that has adopted a similar rule.
-: So the secretary, in your view,
is confined to the lowest common denominator, right?
Whatever the federal government has done
and our sister states have done
or what the Supreme Judicial Court has said,
that's it, nothing above that is unethical or below that,
however you wanna couch it, it's frozen in that way.
-: The laboratory is the democracy allowed.
-: Well, section 415 of the act makes clear
that the stated purpose of the legislature
was to make the law of Massachusetts
uniform with its sister jurisdictions
and the federal government.
And there will be circumstances
where norms will evolve in the industry,
every other time the secretary has enacted a rule
pursuant to the dishonest and unethical provision,
he has based that rule on industry norms,
either on rules adopted by FINRA,
the Financial Industry Regulatory Authority
And I'll just note
that that is not the industry regulating itself
because those rules have to be approved by the SEC
pursuant to notice and comment rulemaking.
He has based his rules on the model rules.
-: Your point is the secretary can't be first,
there has to be some other lead,
somewhere else in the nation in order to follow.
-: There has to be some hook to what is unethical.
-: It has to, but the only hook that has to be
is whether or not, unless it's preemption
or unless this statute collides with the common law
in its application as opposed to being able to coexist
with the common law.
The only question is whether or not the language
of the Uniform Act delegates the power
to the secretary to be able to provide these definitions.
-: That's correct
and we think the answer to that question is no because-
-: Doesn't it provide for broad powers as necessary
to be able to and appropriate
to further the public interest?
That seems like a broad delegatory language.
-: There are three restrictions on that broad delegation.
Number one, it needs to be consistent
with the provisions of the act.
Number two, which includes the plain meaning
of the word unethical.
Number two, it needs to be consistent
with the purposes as stated in the act,
which includes section 415, which requires uniformity.
And number three, it needs to be necessary
and appropriate to carry out the provisions of the act,
not just to do anything that he wants to protect consumers.
This court has made clear-
-: What's our standard of review on his delegation?
-: Well, this, of course this,
the overall standard of review is de novo.
Now this court does defer,
Justice Gaziano: Yes, yes it does.
-: To agency rulemaking.
But not when it's inconsistent with the provisions
of the act and not when it's an unreasonable
interpretation of the act we have.
-: So the act allows the secretary to regulate
and define the term unethical.
He puts out a provision and we defer to him
unless we find he's exceeded his authority
to define the word unethical.
-: Correct.
Justice Georges: Can I add something to that?
Any: Yes.
-: So this isn't the federal SEC
where they also talk about industry choice.
The whole purpose of this act was to protect consumers.
So why isn't what the leading from the front
in terms of protecting consumers
in what the secretary has promulgated with definitions,
how is that inconsistent?
I'm just struggling to figure out how it's inconsistent
when there's a broad mandate from the legislature
saying, go out and protect consumers,
not protect choice, consumers
and that's what the secretary does.
-: The legislature's mandate is twofold.
It's to protect consumers
and to strive to maintain uniformity.
And when the court is construing the words
unethical and dishonest and has to,
those words have to have some meaning
beyond the secretaries say so.
That instruction to make the law uniform,
should lead to an interpretation of those words,
which every other state court has adopted
when construing the exact same language in the act.
-: But when you're saying uniformity,
uniformity with what?
-: Uniformity.
-: 'Cause I'm look looking at it differently
because you keep saying uniformity
with what the SEC's doing or what other states have done.
But doesn't the act itself say consistent
with what we want to do,
not consistent with other states,
consistent with what the purpose of us promulgating
this statute, which is to protect consumers
and I'll read it.
The secretary may, leaving out the words
that don't necessarily apply.
The secretary may make rules as are necessary
to carry out the provisions of this chapter,
including defining any terms insofar
as the definitions are not inconsistent
with the provisions of this chapter.
So they're talking about what their baseline protection is
and that's for consumers.
So why isn't, again, why isn't this consistent?
-: Because section 415 is part of the same chapter.
Judge Georges: Sure.
-: Section 415 says, this chapter shall be so construed
as to effectuate its general purpose to make uniform
the law of those states was enacted.
Now again, there may be circumstances where,
of course the law is not gonna move in lockstep
across every state,
but in interpreting what the words
unethical and dishonest mean,
they have to have some meaning beyond the secretary say so.
And the meaning that every other court
has given to those words, which is consistent
with their plain meaning in the dictionary,
is that those words reflect industry standards
and industry standards are uniform.
Across the industry,
the secretary has previously had no problem
discerning what industry standards are
because every other rule he's promulgated-
-: But wasn't the whole point of regulatory best interest
and the Dodd-Frank Act was the industry
wasn't really doing such a good job of policing itself
and so we needed to up the ante.
-: No, I don't think that was the-
-: No, what do you think the purpose of Dodd-Frank was?
-: Well, the purpose of Dodd-Frank itself
was money fold.
The purpose of this-
-: But relevant to this.
-: Sure, well, relevant to this,
Congress instructed the SEC
to consider whether a fiduciary duty standard
should apply both to investment advisors,
and to broker dealers.
-: But the question is, for what reason, for what reason?
Was because of consumer confusion.
-: Sure I take the secretary's primary premise
to be that he thinks the law as it exists or as it existed,
is confusing to consumers
and therefore the law should be changed
to match consumer expectations.
That is an argument.
-: But even the federal government
changed the standard from suitability to best interest.
And you're saying that best interest
has somehow become a ceiling.
And I'm wondering why the secretary can't,
within the broad rulemaking authority that he's got,
define, you know, make a bigger delta.
-: Sure so let me give two answers to that.
I think first of all, it's quite important
that Congress expressly authorized the SEC
to consider whether to make this change to the law
as it relates to the duties that broker dealers owe.
And there's no similar delegation of authority.
-: Justice Georges just read, my goodness,
that is one broad delegation to the secretary.
-: But it's not a delegation to change the law
and the law that has existed in this commonwealth
for a century is that broker dealers
do not owe fiduciary duties when they make recommendations.
-: It may not be expressly saying change the law,
but it's certainly not saying have it frozen for all time
a century ago and given that the SEC
was charged with changing the law by Congress,
why can't we, in the interest of uniformity,
or I should say the secretary,
in the interest of uniformity,
also change the standard
given the broad rulemaking authority
that the secretary has been given?
-: Well, I think if he had enacted a rule
that says you should comply with regulation best interest,
we wouldn't be here.
-: But he wouldn't need to do that, right?
-: Well, if he wanted to bring an enforcement action
against a broker dealer-
-: Sort of a piggyback action, but he wants his own action,
he wants to make sure that Robinhood
and broker dealers who dip their toe into giving advice
also avoid, mitigate or I guess yeah,
moderate any conflict of interest.
-: Sure well, let me address that
from the preemption argument
because we haven't quite touched on that yet.
With respect to preemption,
the SEC's regulation itself has preemptive effect.
It is just not the case
that you need to have an expression of preemption
from Congress and a statute.
The Supreme Court has said over and over again
that regulations themselves have preemptive effect.
It said that in Grier, it said that in Merck,
it said that in capital cities.
Regulations are federal law
and federal law preempts state law.
The SEC made quite clear
when it enacted regulation best interest
that it was rejecting the secretary's proposal.
It expressly rejected without regard to,
language that he adopted in his rule.
And it did so because it feared that language
would make it difficult to maintain
the traditional broker dealer model
because it could be construed
to require complete elimination of conflicts of interest
and it viewed that as a negative policy outcome
for there to be fewer broker dealers
offering services pursuant to a broker dealer model.
It had the express purpose of wanting to maintain a choice.
-: So may I ask then, when that was promulgated,
wasn't the SEC aware of other states
that had imposed these fiduciary obligations in the-
-: It was aware of states just like Massachusetts
that imposed fiduciary obligations
in various circumstances,
like when there is discretion and control over an account.
-: Sure, so I'm posing that in terms of what you just said.
So wouldn't this be the exact circumstance,
where if they were going to expressly preempt,
they would say so when they're aware
that other jurisdictions do exactly what you're saying,
they rejected?
Wouldn't this be the place to say so?
-: No, I don't think so.
I don't think you can read anything in the SEC rulemaking
to say that the SEC thought there were states
that are already doing what Secretary Galvin is doing.
In fact, he said he was the first of its kind.
It simply said there are various approaches
to fiduciary duties out there in the various states,
just like Patsos.
-: They expressly recognize that, what was it,
section 913 maybe, they expressly recognized.
Judge Georges: And didn't they-
-: Right and so that's why it would have been inappropriate
for the SEC to attempt to express
what would or would not be preempted
because there were too many different articulations
of the law.
-: But in that provision,
they expressly punted on the issue of preemption.
-: They punted to, to Your Honors,
they punted to, to the courts.
-: Speaking of punting, we're in the fourth quarter, so.
Amy Saharia: Yes.
-: Will we ask if there are any further questions?
Judge Georges: No, there aren't, no Justice Gaziano.
Judge Gaziano: All right, I'm gonna blow the whistle,
all right. -: Thank you.