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The sanctions represent the largest financial penalty ever ordered by FINRA
On top of the fine, FINRA has ordered Robinhood to pay $12.6 million in restitution, plus interest, to “thousands of harmed customers”.
The sanctions represent the largest financial penalty ever ordered by FINRA, which it says reflects “the scope and seriousness of the violations”.
The harm refers to those who it says received “false or misleading information” from the firm, users affected by Robinhood’s system outages in March 2020, and customers the firm approved to trade options “even when it was not appropriate” to do so.
The regulator has found issues with the way Robinhood portrayed information to customers, the methods through which it approved options trading, and the technology it uses to provide broker-dealer services.
FINRA says its investigation into the company found Robinhood has “negligently communicated false and misleading information to its customers”.
The regulator says this misleading information included a variety of critical issues: Whether customers could place trades on margin, how much cash was in customers’ accounts, how much buying power or “negative buying power” customers had, and their risk of losses.
Customer losses
FINRA also makes reference to the case of 20-year-old Alex Kearns, who committed suicide after thinking his trades left him in $700,000 worth of debt.
The regulator says Robinhood’s miscommunication led to customers suffering more than $7 million in total losses.
It also claims Robinhood failed to exercise due diligence before approving customers to place options trades.
FINRA says 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”.
FINRA claims Robinhood also failed to reasonably supervise the technology that it relied upon to provide core broker-dealer services.
The ruling makes reference to the damaging outages the app suffered in March 2020. The lockout prevented customers from accessing their accounts at “a time of historic market volatility”.
FINRA charges Robinhood with failing to report “tens of thousands” of written customer complaints to the regulator that it was required to report.
It says the trading firm failed to report complaints that it provided customers with false and misleading information, and that customers suffered losses due to its actions.
According to FINRA, Robinhood neither admitted nor denied the charges, but consented to the entry of its findings.
Robinhood’s response
Robinhood posted a blog on the same day as FINRA’s announcement, stating that it is enhancing its customer support and improving on how information is displayed on its app.
“We have substantially expanded and enhanced our customer support resources and services, including services provided to options and margin customers,” it writes.
“We’ve hired hundreds of new customer support team members, with plans to double the number of registered reps throughout 2021.”
The firm says it has made significant improvements to the way it supervises its technology and engineering infrastructure.
It says it has taken steps to address the root causes of the March 2020 outages, reduce the risk of future outages, and increase the resilience of relevant systems.
Raft of legislation and lawsuits
FINRA isn’t the only US regulatory agency investigating Robinhood – nor has it been the first to censure it.
The Massachusetts Securities Division filed an administrative complaint against the company in December 2020. It alleged that the $11.7 billion-valued digital broker “aggressively” marketed its products to investors without their “best interests”.
Robinhood responded to that filing by calling the state regulator “elitist” and harbouring “an old way of thinking”.
Robinhood is also being investigated by the Securities and Exchange Commission (SEC). The SEC is looking at how the brokerage displays options trades and cash positions to its customers.
So far, fintech has paid $65 million to the SEC over deal disclosures. The investigation found the start-up failed to fully disclose its tactic of selling orders to high-speed trading firms.
In a bid to placate regulators, the California-based stock trading app hired two executives from FINRA in January.
Then there’s the Gamestop saga from January, which saw the fintech restrict certain trades.
It caused customers to lose out on positions they couldn’t sell, or positions they wanted to buy but couldn’t. This episode prompted a further 49 lawsuits against the firm.
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