© Reuters. FILE PHOTO: The Robinhood app displayed on a screen in this photo illustration dated Jan 29, 2021. REUTERS / Brendan McDermid / Illustration
By Chris Prentice and Pete Schroeder
WASHINGTON (Reuters) – Wall Street regulator on Wednesday fined Robinhood Financial LLC $ 70 million for "systemic" failures, including system failures, providing "false or misleading" information, and weak controls over options trading.
The Financial Industry Regulatory Authority (FINRA) fine is the latest blow to Robinhood's reputation. The broker, credited with democratizing trade, is under scrutiny by federal and state policymakers following this year's meme stock fiasco that raised questions about the California company's business model, risk management, and customer treatment.
However, the far-reaching agreement that resolves suspected FINRA violations from September 2016 likely paves the way for the company to move quickly with a planned IPO that has been delayed due to meme stock setbacks and other regulatory issues.
Robinhood's solution with FINRA includes a $ 12.6 million reimbursement to thousands of customers and a $ 57 million fine, the largest in regulator history, and covers a range of issues dating back to September 2016, said FINRA in a statement.
"The fine … reflects the scope and gravity of Robinhood's violations, including FINRA's finding that Robinhood provided false and misleading information to millions of its customers," said Jessica Hopper, FINRA's head of enforcement.
According to FINRA, these communications related to whether clients could place trades on margin, how much cash was in their accounts, how much purchasing power they had, the risk of clients losing certain transactions, and whether clients were facing margin calls.
FINRA discovered that a Robinhood client had committed suicide in 2020 after being confused by messages on his account that appeared to show that he had disabled margin trades and was falsely showing a negative cash balance. Thousands of other customers suffered losses of more than $ 7 million due to similar misrepresentation, FINRA claimed.
Robinhood also failed to properly monitor its technology between 2018 and late 2020, resulting in a "series of outages and critical system outages," including a major outage during the March 2020 pandemic turmoil that resulted in customers losing money, it said FINRARA.
During the same period, Robinhood also failed to properly screen customers before allowing them to place risky option bets, FINRA claimed.
Robinhood has neither admitted nor denied the charges, but has agreed with FINRA's findings. The company said in a statement that it is overhauling its business, introducing new regulatory and communication procedures, and hiring a number of lawyers, including former regulators.
"The message is clear: you can try to democratize investments and demystify finances, but you can't cut corners," said Robert Frenchman, attorney at Mukasey Frenchman & Sklaroff, who added that the deal is good news for the IPO should be.
“That's good because it clears up so many issues that you can now say that you have reached an agreement with regulators. I see the value – it's a lot of money – in settling such a salad of FINRA violations. "
FINRA, a self-regulatory agency reporting to the Securities and Exchange Commission (SEC), fined Robinhood $ 1.25 million in 2019 for failed order execution.
The SEC has also targeted Robinhood, fining the company $ 65 million last year for paying fees it misled customers about its revenue streams.
Still, Robinhood's legal and regulatory troubles are unlikely to be over. The SEC is also considering new rules to curb gamification, game-like features that encourage commerce, and payments where brokers send retail orders to wholesale brokers for a fee – practices both used by Robinhood.
Massachusetts Secretary of State Bill Galvin, who is also prosecuting the company, said he was "pleased" that FINRA had investigated Robinhood's wrongdoing, but questioned whether the customer refund of US $ 12.6 million Dollar is sufficient.