Robinhood Financial’s regulatory woes are piling up.
The SEC charged the stock trading app Thursday morning with misleading customers about how it earns revenue, and for failing to seek the best reasonably available terms to execute trade orders. The charge comes a day after
Robinhood has agreed to pay $65 million to settle the SEC case. Separately, the company says it will defend itself from Massachusetts' charges.
“The settlement relates to historical practices that do not reflect Robinhood today,” the firm’s chief legal officer, Dan Gallagher, said in an emailed statement.
A Robinhood spokesperson added, “We are fully transparent in our communications with customers about our current revenue streams, have significantly improved our best execution processes, and have established relationships with additional market makers to improve execution quality.”
The action comes during a year of rapid growth for the fintech company, which was founded in 2013. Robinhood surpassed 13 million users in 2020, with three million signing up during the first fourth months of the year, according to Bloomberg.
Though Robinhood offers “commission-free trading” to investors, it earns revenue from trading firms who receive customer orders and execute the trades — a practice known as “payment for order flow.” Between 2015 and 2018, Robinhood made misleading statements and omissions in customer communications about this practice, including the FAQ section of its website, according to the SEC.
Unusually high payments for order flow contributed to Robinhood customers receiving an inferior price to other brokers, according to the regulator. In aggregate, this cost investors $34.1 million, even after accounting for the money they saved from not paying a commission, the SEC says.
However, the firm continued to claim on its website that the quality of its trade execution matched or beat competitors, the regulator says.
“Robinhood provided misleading information to customers about the true costs of choosing to trade with the firm,” Stephanie Avakian, director of the SEC’s enforcement division, said in a statement. “Brokerage firms cannot mislead customers about order execution quality.”
This isn’t the first time Robinhood’s order flow practices have come under fire from regulators. In 2019,
“Robinhood failed to seek to obtain the best reasonably available terms when executing customers’ orders, causing customers to lose tens of millions of dollars,” said Joseph Sansone, chief of the SEC enforcement division’s market abuse unit.
The $65 million penalty is part of a cease-and-desist order that also censures Robinhood and prohibits the firm violating the antifraud provisions of the Securities Act of 1933 and the recordkeeping provisions of the Securities Exchange Act of 1934. Robinhood also agreed to retain an independent consultant to review policies and procedures relating to payments for order flow and customer communications.
“There are many new companies seeking to harness the power of technology to provide alternative ways for people to invest their money,” said Erin Schneider, director of the SEC’s San Francisco regional office. “But innovation does not negate responsibility under the federal securities laws.”
The separate case filed by Massachusetts’ top financial regulator, William Galvin, charged Robinhood with breaching its fiduciary duty by aggressively marketing to inexperienced investors, manipulating them with gamification strategies and failing to prevent frequent outages. Robinhood is disputing the charges.
