Finra Slams Robinhood with Record $70 Million Settlement over Supervisory Failures
The Financial Industry Regulatory Authority has reached a record $70 million settlement with commission-free trading app Robinhood Financial over broad supervisory failures and outages, according to an announcement.
“This action sends a clear message—all FINRA member firms, regardless of their size or business model, must comply with the rules that govern the brokerage industry, rules which are designed to protect investors and the integrity of our markets,” Jessica Hopper, head of Finra’s enforcement department, said in a statement.
The broker-dealer, which must also hire a compliance consultant as part of the agreement, settled the matter without admitting or denying the regulator’s claims. A spokeswoman said the firm has made many changes to its platform and bolstered its compliance over the last several years.
“Robinhood has invested heavily in improving platform stability, enhancing our educational resources, and building out our customer support and legal and compliance teams,” Jacqueline Ortiz Ramsay. “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, which was founded in 2014 and reportedly secured a valuation around $40 billion in its latest private funding round, had sought to go public this month but was waylaid by regulatory reviews, particularly around its crypto-currency trading, according to earlier reports.
Its popularity soared during the pandemic, but also drew complaints as well as class action claims over many of the underlying allegations in Wednesday’s Finra enforcement action as well as scrutiny over its ‘gamification’ of trading. It has 31 million customers with 18 million funded accounts, according to Finra’s settlement document.
Finra said that “despite Robinhood’s self-described mission to ‘de-mystify finance for all,’” the broker-dealer gave customers false and misleading information about “critical issues” such as whether they could trade on margin, how much cash was in their accounts, the amount of buying power the customers had and the risk of loss they faced on options transactions.
The brokerage industry self-regulator cited a tragic, high profile case in which one customer took his own life after finding that margin had been unexpectedly turned on in his account and seeing a negative account balance of $720,000 that the app had inaccurately displayed.
“Robinhood also displayed to this individual (and certain other customers) inaccurate negative cash balances,” Finra said. “Additionally, due to Robinhood’s misstatements, thousands of other customers suffered more than $7 million in total losses.”
Robinhood, which began offering options trading to customers in December 2017, also used algorithms or “option account approval bots” to approve customers for options trades. Those bots had limited oversight from firm principals, resulting in improper approval of thousands of customers who did not meet eligibility criteria, Finra said.
The regulator also noted that Between 2018 and February 2021, Robinhood failed to reasonably supervise its technology system or ensure that it had a business continuity plan in place to sustain trading through the pandemic, a “time of historic market volatility,” according to Finra’s announcement.
As a result customers were unable to access accounts or execute orders during a series of outages, including its most serious failure on March 2 and March 3, when its website and mobile applications shut down.
“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,” Finra said.
According to Finra, Robinhood also failed to report thousands of written customer complaints between January 2018 and December 2020. The complaints focused on some of the misleading information that Robinhood had provided as well as outages, and the platform had wrongly miscategorized a number of reportable complaints as exempt from reporting, Finra said.
Robinhood in 2019 agreed to pay $1.25 million in a Finra settlement over best execution requirements, and it in December paid $65 million to resolve an Securities and Exchange Commission claim that it did not make proper disclosures around payment for order flow.