The online brokerage is paying a record fine and restitution to settle multiple allegations.
Self-regulatory organization (SRO) FINRA has fined online brokerage Robinhood Financial $57 million and required $12.6 million in restitution to investors allegedly harmed by the firm, which says that it has improved its platform stability, and neither admits nor denies the charges of the settlement.
“The sanctions represent the largest financial penalty ever ordered by FINRA and reflect the scope and seriousness of the violations,” according to a FINRA statement.
The regulator’s actions follow a request in February from Wall Street critic and U.S. Senator Elizabeth Warren (D-Mass.) that FINRA “respond to Robinhood’s role in recent market volatility, its decision to cut off customers’ trading, and the broader concerns about market fairness that these events represent.”
Sen. Warren was referring to the Robinhood Markets trading app and platform at the heart of the Gamestop short-selling controversy. At the peak of the frenzy, Robinhood halted trading in that stock by its clients. The firm’s customers filed lawsuits and got the attention of politicians such as Warren (https://bit.ly/2Mvdm9M). In addition, this past December Robinhood Financial paid $65M to settle an SEC case against (https://bit.ly/386zRd7).
The current FINRA settlement focused on the “millions of customers who received false or misleading information from the firm, millions of customers affected by the firm’s systems outages in March 2020, and thousands of customers the firm approved to trade options even when it was not appropriate for the customers to do so,” according to FINRA.
While Robinhood’s stated mission is “to ‘de-mystify finance for all’ and to make investing ‘understandable for newcomers and experts alike,’ during certain periods since September 2016, the firm has negligently communicated a wide array of false and misleading information to its customers,” FINRA alleges.
FINRA’s investigation found that the “misleading information concerned a variety of critical issues, including whether customers could place trades on margin, how much cash was in customers’ accounts, how much buying power or ‘negative buying power’ customers had, the risk of loss customers faced in certain options transactions, and whether customers faced margin calls.”
FINRA officials cite a Robinhood customer “who had turned margin ‘off,’ tragically took his own life in June 2020. In a note found after his death, he expressed confusion as to how he could have used margin to purchase securities because, he believed, he had not ‘turned on’ margin in his account.”
The settlement with FINRA notes that the firm “displayed to this individual (and certain other customers) inaccurate negative cash balances. Additionally, due to Robinhood’s misstatements, thousands of other customers suffered more than $7 million in total losses. As part of this settlement, Robinhood is required to pay more than $7 million in restitution to these customers.”
The regulator is also alleging that Robinhood did not conduct enough due diligence “before approving options accounts,” and failed to oversee technology that was “critical to providing customers with core broker-dealer services.”
FINRA says that the firm “relied on algorithms — known at Robinhood as ‘option account approval bots’ — to approve customers for options trading, with only limited oversight by firm principals. Those bots often approved customers to trade options based on inconsistent or illogical information.”
Some of the approved customers “either did not satisfy the firm’s eligibility criteria” or had accounts with “red flags indicating that options trading may not have been appropriate for them,” according to FINRA.
Another area of concern for FINRA is the firm’s problems with its transaction technology from January 2018 to February 2021.
“Between 2018 and late 2020, Robinhood experienced a series of outages and critical systems failures. The most serious outage occurred on March 2 and 3, 2020, when Robinhood’s website and mobile applications shut down, preventing Robinhood’s customers from accessing their accounts during a time of historic market volatility,” according to FINRA.
“Although the firm had a business continuity plan at the time of the March 2-3 outage, it did not apply it because the plan was unreasonably limited to events that impacted the firm’s physical location. Robinhood’s inability to accept or execute customer orders during these outages resulted in individual customers losing tens of thousands of dollars, and FINRA is requiring that the firm pay more than $5 million in restitution to affected customers,” according to FINRA.
In addition, FINRA is alleging that between January 2018 and December 2020 the firm “failed to report to FINRA tens of thousands of written customer complaints that it was required to report.” The complaints cover alleged false and misleading information, and customer losses due to outages and systems failures. The settlement resolves other charges such as the firm’s “failure to have a reasonably designed customer identification program and its failure to display complete market data information.”
FINRA’s action “sends a clear message — all FINRA member firms … must comply with the rules that govern the brokerage industry, rules which are designed to protect investors and the integrity of our markets. Compliance with these rules is not optional and cannot be sacrificed for the sake of innovation or a willingness to ‘break things’ and fix them later,” says Jessica Hopper, executive vice president and head of FINRA’s Department of Enforcement, in a prepared statement.
Robinhood officials have consented to FINRA’s findings and a spokesperson for the firm Jacqueline Ortiz Ramsay says that changes are underway.
“Robinhood has invested heavily in improving platform stability, enhancing our educational resources, and building out our customer support and legal and compliance teams,” Ramsay says in a prepared statement. “We are glad to put this matter behind us and look forward to continuing to focus on our customers and democratizing finance for all.”
The firm is providing more details via a blog posting that can found here: https://bit.ly/365seC6
The 123-page FINRA order can be found here: https://bit.ly/3w8mvGf
Robinhood Financial is a registered broker-dealer and Robinhood Securities offers brokerage clearing services. Robinhood Crypto provides cryptocurrency trading.
Need a Reprint?