Robinhood IPO – Continued Regulatory Issues After Going Public
BY: Aspen Schneider, RBFL Student Editor
Throughout its eight years of operation, Robinhood has faced many problems. The company has been penalized by multiple regulatory bodies for a variety of offenses. In response to the penalties, Robinhood has made hopeful additions to the board of directors and made various improvements within the platform. However, regardless of efforts to improve, it is likely that Robinhood will face more regulatory challenges in the future. The mission of Robinhood is to “democratize finance for all.” However, is the company truly bringing finance to the people if regulatory matters indicate otherwise?
Amongst the various penalties that Robinhood has faced are massive fines from the SEC and FINRA. The SEC found that, between 2015 and 2018, Robinhood made misleading statements and omissions in customer communications regarding its largest revenue source when describing how it created revenue. One of the marketed attractions of Robinhood is that it offers “commission free” trading to users. However, due in part to unusually high payment for order flow rates, Robinhood executed user orders at prices that were inferior to those of other brokers. In aggregate, Robinhood provided inferior trade prices that deprived customers of $34.1 million, even after accounting for the savings derived from not paying a commission.
On June 30, 2021, FINRA announced that it had fined Robinhood $57 million and ordered the company to pay approximately $12.6 million in restitution to harmed customers. This is the largest financial penalty ever ordered by FINRA. First, FINRA found that during certain periods after September 2016, Robinhood negligently communicated false and misleading information to its customers despite its mission to “de-mystify finance for all.” Second, FINRA found that since Robinhood began offering options trading to customers in December 2017, Robinhood had failed to exercise due diligence before approving customers to place options trades. Third, “FINRA found that from January 2018 to February 2021 Robinhood failed to reasonably supervise the technology that it relied upon to provide core broker-dealer services, such as accepting and executing customer orders.” Fourth, FINRA found that between 2018 and 2020 Robinhood failed to report tens of thousands of written customer complaints that it was required to report to FINRA.
The penalties that Robinhood faced are likely not the last. Robinhood’s IPO documents show that the company has reserved millions of dollars for a potential settlement with the New York Department of Financial Services over “anti-money laundering and cybersecurity-related issues.” Robinhood’s registration statement also notes the outstanding investigations that are not resolved by the FINRA order, including issues with Robinhood’s customer support procedures and customer arbitration agreements.
Robinhood acknowledges that it is “subject to claims and lawsuits in the ordinary course of business, including arbitrations, class actions and other litigation…” The company continues by noting that it “operate[s] in a highly regulated industry and many aspects of [its] business involve substantial risk of liability, and [it is] regularly the subject of actions, inquiries, investigations, examinations and proceedings by regulatory and other governmental agencies.” From speculation from industry experts, as well as Robinhood itself, it is probable that there are many more penalties in the company’s future.
Sources:
Press Release, Sec. and Exch. Comm’n, SEC Charges Robinhood Financial With Misleading Customers About Revenue Sources and Failing to Satisfy Duty of Best Execution (Mar. 21, 2020) (on file with author).
Press Release, Financial Industry Regulatory Authority, FINRA Orders Record Financial Penalties Against Robinhood Financial LLC (June 30, 2021) (on file with author).
Registration Statement, File No. 333-258474 (July 1, 2021)[hereinafter Registration].