FINRA: Robinhood Hit with $70 Million Penalty for Systemic Supervisory Failures

FINRA has ordered Robinhood to pay a record-breaking $70 million penalty for “systemic supervisory failures and significant harm suffered by millions of customers.” In settling with FINRA, Robinhood neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

FINRA said in a statement that the fine included $57 million and along with $12.6 million in restitution, plus interest regarding the “thousands of harmed customers.”

FINRA said 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 systems outages in March 2020, and thousands of customers the firm approved to trade options even when it was not appropriate for the customers to do so.”

Jessica Hopper, Executive Vice President and Head of FINRA’s Department of Enforcement, stated:

“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. 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. The fine imposed in this matter, the highest ever levied by FINRA, reflects the scope and seriousness of Robinhood’s violations, including FINRA’s finding that Robinhood communicated false and misleading information to millions of its customers.”

FINRA added that since 2016 Robinhood has negligently communicated false and misleading information to its customers.

“The false and misleading information concerned a variety of critical issues, including 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 claimed that due to Robinhood’s misstatements, thousands of other customers suffered more than $7 million in total losses.

FINRA also found that since Robinhood began offering options trading in December 2017, the firm has failed to exercise due diligence before approving customers to place options trades.

FINRA said that Robinhood utilized algorithms or “option account approval bots”—to approve customers for options trading, with only limited oversight by firm principals. Those bots were said to often approve customers to trade options based on inconsistent or illogical information.

FINRA stated that Robinhood approved thousands of customers for options trading who either did not satisfy the firm’s eligibility criteria or whose accounts contained red flags indicating that options trading may not have been appropriate for them.

FINRA also 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.

Between 2018 and late 2020, Robinhood experienced a series of critical systems failures. The most serious outage occurred on March 2 and 3, 2020, when Robinhood’s website and mobile applications shut down, preventing Robinhood’s customers from accessing their accounts during a time of historic market volatility.

FINRA also noted that between January 2018 and December 2020, Robinhood failed to report to FINRA tens of thousands of written customer complaints that it was required to report. FINRA said that Robinhood’s reporting failures were the result of a firm-wide policy that exempted certain broad categories of complaints from reporting, even though those categories fell within the scope of FINRA’s reporting requirements.

Earlier this month, the Securities and Exchange Commission, Division of Enforcement,  submitted to the Commission a proposed plan of distribution regarding Robinhood’s failure to disclose its receipt of payment for order flow in certain of its communications with its retail customers.

The “Net Available Fair Fund” is comprised of $65,000,000.00 in civil money penalties to be paid by Robinhood, plus interest and income earned thereon, minus all taxes, fees, and other expenses of distributing the Net Available Fair Fund.

 

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