Robinhood Financial has been ordered to pay nearly $70 million for systemic supervisory failures in the largest financial penalty ever ordered by the self-regulatory organization.
According to the June 30 announcement, FINRA imposed fines of $57 million and ordered the firm to pay approximately $12.6 million in restitution, plus interest, to thousands of harmed customers.
In determining the appropriate sanctions, FINRA notes that it considered the widespread and significant harm suffered by customers, including millions of customers who received false or misleading information from the firm, millions of customers affected by the firm’s March 2020 system outages, and thousands of customers the firm approved to trade options even when it was not appropriate for the customers to do so.
In settling the matter, Robinhood neither admitted nor denied the charges, but consented to the entry of FINRA’s findings. As part of its corrective action statement, Robinhood says that it has undertaken numerous remedial measures since early 2020, including:
- the restructuring and enhancement of its legal, compliance and anti-fraud functions;
- strengthening of its supervisory structure and written procedures, including with respect to supervision of technology;
- expansion of customer support, including with respect to options and margin trading;
- remediation of certain customer communications and data displays at issue; and
- improved supervision of options trading.
Robinhood also has agreed to continue to retain, at its own expense, a third-party consultant to conduct a comprehensive review of the adequacy of Robinhood’s compliance with all the areas identified in the settlement.
“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,” stated Jessica Hopper, Executive Vice President and Head of FINRA’s Department of Enforcement. “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.”
False and Misleading Info
As for the violations, FINRA found in its investigation that during certain periods since September 2016, the firm “negligently communicated false and misleading information to its customers.” This included 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 notes that in one instance, a Robinhood customer who had turned margin “off” took his own life in June 2020. A note found after his death revealed that 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. As noted in the settlement, Robinhood also displayed to this individual, and other customers, inaccurate negative cash balances.
Option Account Approval Bots
FINRA also found that since Robinhood began offering options trading to customers in December 2017, the firm failed to exercise due diligence before approving customers to place options trades. The firm apparently relied on algorithms—known as “option account approval bots”—to approve customers for options trading, with only limited oversight by firm principals. According to FINRA, those bots often approved customers to trade options based on “inconsistent or illogical” information. As a result, Robinhood approved thousands of customers for options trading who either did not satisfy the firm’s eligibility criteria or whose accounts contained red flags.
Business Continuity and Supervisory Failures
Robinhood also failed to reasonably supervise the technology that it relied upon to provide core broker-dealer services, such as accepting and executing customer orders. FINRA notes that between 2018 and late 2020, Robinhood experienced a series of outages and critical systems failures, with the most serious outage occurring on March 2 and March 3, 2020, when Robinhood’s website and mobile applications shut down, preventing the firm’s customers from accessing their accounts during a time of historic market volatility. While Robinhood had a business continuity plan at the time, apparently it did not apply it because the plan was limited to events that affected the firm’s physical location, the settlement notes.
Additionally, from 2018 through 2020, Robinhood failed to report to FINRA tens of thousands of written customer complaints that it was required to report. This included complaints that Robinhood provided customers with false and misleading information, and that customers suffered losses because of the firm’s outages and systems failures.
The settlement also addresses numerous other charges against Robinhood, including the firm’s failure to have a reasonably designed customer identification program and its failure to display complete market data information.
Robinhood remains the subject of a class-action lawsuit and has already been targeted by other regulatory agencies, including the SEC and Massachusetts Secretary of the Commonwealth William Galvin, who charged Robinhood in December 2020 over the company’s “aggressive tactics” to attract inexperienced investors, in the first enforcement action of its fiduciary rule.
