Massachusetts Securities Regulator Expected to File Complaint Against Robinhood – Report

Robinhood, a digital investment platform that has encouraged a new generation of investors to enter the markets, is a target of an administrative complaint by the State of Massachusetts, according to the WSJ.com

According to the report, Massachusetts Securities Division said that “Robinhood failed to protect its customers and their assets, violating state laws and regulations. Robinhood exposed Massachusetts investors to “unnecessary trading risks” by “falling far short of the fiduciary standard” adopted this year that requires broker-dealers to act in their clients’ best interest.”

Robinhood has emerged as a popular investment platform catering to a younger demographic with the opportunity to purchase fractional shares – commission-free – or invest in popular cryptocurrencies. The Fintech’s low-cost approach has rattled more established trading platforms such as Schwab and ETrade, compelling these firms to compete with lower costs and improved services.

Earlier this year, Robinhood added interest-bearing, FDIC insured accounts for cash quickly seeing over a million customers take advantage of this feature as it adds more bank-like services.

A statement on the Robinhood site explains its mission:

“Before the days of zero commission fees across the industry, Robinhood was founded on the belief that everyone should have equal access to the financial system, not just the wealthy. We pioneered commission-free investing, building a mobile-first platform and making investing accessible through intuitive design, access to news, and digestible financial resources. 

Stock ownership has become more diverse than ever before, and we’ve helped open up investing for millions of people, particularly newer generations (the median age of a Robinhood investor is 31).”

Over 13 million individual accounts are now active on the platform.

The Massachusetts Securities Division has regularly targeted more innovative or alternative financial services firms. In the early days of investment crowdfunding, the Division was a regular critic. In December 2017, Secretary of the Commonwealth William F. Galvin, who leads the Securities Division, warned about “Bitcoin mania.”

The complaint against Robinhood is said to focus on the “gamification” of investing that encourages use of the platform. The Division is said to allege that Robinhood allowed an investor with no investment experience to complete over 12,700 trades in a period of six months.

Additionally, Robinhood is said to allow options trading for users with little experience. The report also states:

“Like many brokerages, Robinhood makes money by a practice called payment for order flow, sending customer orders to trading firms in return for cash payments. By encouraging inexperienced investors to continuously execute trades, “Robinhood prioritized its revenue over the best interest of its customers…”

The complaint is apparently being filed to protect “young” investors. Almost 500,000 accounts are said to be held by Massachusetts residents.

 

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