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Even before Robinhood Financial LLC entered the spotlight late last month for having halted trading in Game Stop during that company’s unprecedented short squeeze, Robinhood had already been charged with allegedly violating state securities laws in connection with its business practices. In December of last year, the Securities Division of the Massachusetts Secretary of the Commonwealth sued Robinhood, alleging that the company had engaged in aggressive marketing tactics aimed at young, inexperienced customers. The complaint was based in large part on alleged violations of the duty to act in customers’ best interest, as required by regulations adopted in March 2020 imposing upon broker-dealers the same fiduciary duty applicable to investment advisers operating within the Commonwealth.

According to the complaint, Robinhood failed to act in the best interests of its customers and exposed them to unnecessary trading risks. The Company directed its market at young, inexperienced investors. When they opened accounts, the Company encouraged its customers to use the trading platform frequently and approved unqualified clients for options trading. Although not mentioned in the suit, a 20-year old college student from Illinois committed suicide last summer because he mistakenly thought he owed over $700,000 based on options trades he had made using the Robinhood platform. Earlier this week his parents sued Robinhood, making allegations that echoed the Massachusetts regulator’s charges.

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We don’t typically venture into politics in the RIA Compliance Blog except to explain or predict regulatory trends, and this post is no exception. But something happened recently in the political realm that made me want to explain to non-Georgia natives how much we native Georgians really love our state.

In case you haven’t heard, the President of the United States claims that the recent presidential election held here in our home state of Georgia was fraudulent. This past weekend, he telephoned our Secretary of State, Brad Raffensperger, to explain the many reasons for his belief.

Near the end of the call, President Trump informed Raffensperger that his office has a list of about 4,500 people who had moved away from Georgia prior to the 2020 election but voted in the election anyway. Raffensperger’s attorney informed the President that the Secretary of State’s office has investigated the names on that list and has thus far has concluded that all the people on the list once lived in Georgia, moved out of state, then moved back to Georgia legitimately. This response truly perplexed President Trump, who said:

“How many people do that? They moved out, and then they said, ‘Ah, to hell with it, I’ll move back.’ You know, it doesn’t sound like a very normal — you mean, they moved out, and what, they missed it so much that they wanted to move back in? It’s crazy.”

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The U.S. Securities and Exchange Commission yesterday issued long-anticipated changes to the rules governing marketing for RIAs, including managers of private funds. The changes are designed to modernize the rules to account for the era of digital communication and other marketplace “evolutions.” The rule changes also impact firms’ uses of testimonials and paid solicitors.

By a 5-0 vote, the amendments will replace prior separate rules into a single comprehensive rule that deals with advertising and solicitation. The replaced rules date back to the 1970s and earlier.

By and large, the rules allow for more flexibility. For instance, instead of a blanket prohibition of testimonials, the new rule permits testimonials if certain disclosures are made. These disclosure requirements dovetail with the emphasis on preventing conflicts of interests that was the focus of last year’s IA Release 5248, relating to advisers’ fiduciary duty. The rules also create additional questions related to marketing on Form ADV Part 1.

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