The Robinhood App appears on a screen in this photo illustration on January 29, 2021. REUTERS / Brendan McDermid / Illustration
Massachusetts regulators on Thursday filed for withdrawal of Robinhood’s broker-dealer license after accusing it encouraging inexperienced investors to place risky trades without restrictions, while the online brokerage filed a lawsuit to invalidate a new rule underlying the case to make.
Massachusetts Secretary of State Bill Galvin filed for a revocation in a revised administrative case announced shortly after Robinhood was indicted in Boston state court to challenge a fiduciary standard of conduct that took office last year.
“We don’t believe our clients are as naive as the Massachusetts Securities Division describes them,” Robinhood said in a statement.
Galvin announced the case against Menlo Park, California-based Robinhood, in December before the social media-driven rally in stocks like GameStop, driven by retail investors using Robinhood and other apps, pushed up the prices of their shares.
Galvin, the state’s chief securities regulator, accused Robinhood of using aggressive tactics to attract inexperienced investors and failing to prevent outages on its platform. read more
He alleged that the app-based service used strategies that treated trading like a game to entice young, inexperienced customers, including raining down confetti for every transaction made on the app.
The case is the first enforcement action brought under a state fiduciary rule that went into effect in September that raised the investment advisory standard for brokers.
Robinhood argued in his lawsuit that Galvin lacked the authority to override a long-standing conclusion by the Massachusetts Supreme Court that brokerage firms like herself are not viewed as fiduciaries of their clients.
It said the state legislature has done nothing to change the court’s decision and he did not have the authority to take over his rule.
Robinhood said the rule is also an obstacle to federal regulation, saying the U.S. Securities and Exchange Commission passed its own rule in 2019 for brokerage firms that explicitly rejected the standard that Galvin enforced.
Galvin, seen nationally as an aggressive government bond regulator, cited the lawsuit in a statement as “ another example of Robinhood’s complete rejection of responsibility to their clients. ”
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