$70 million: FINRA slaps Robinhood with “largest financial penalty ever”

Rick Steves

“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.”

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Robinhood was ordered to pay a total of $69.6 million to the Financial Industry Regulatory Authority (Finra) for having “hurt customers by giving them misleading information, by suffering systems outages in March 2020, and by approving thousands of customers to trade options even when it was not appropriate.”

FINRA fined the neo broker $57 million and ordered the trading app to pay approximately $12.6 million in restitution, plus interest, to thousands of “harmed customers”.

The regulator claims the firm has at times negligently communicated false and misleading information to its customers despite its
“self-described mission to “de-mystify finance for all.”

The financial watchdog also found that Robinhood began offering options trading to customers in December 2017, with no due diligence before approving customers to place trades: “often approved customers to trade options based on inconsistent or illogical information”.

The sanctions represent the largest financial penalty ever ordered by FINRA. In December 2020, the SEC slapped a $65 million fine on Robinhood for misleading customers about its PFOF model.

“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”, said Jessica Hopper, Executive Vice President and Head of FINRA’s Department of Enforcement.

“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.”

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.

Robinhood was also found to fail 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 outages and critical systems failures.

Also between that period, the neo broker to report to FINRA tens of thousands of written customer complaints that it was required to report. The settlement resolves 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.

In late 2019, FINRA imposed a $1.25 million fine on Robinhood for best execution violations related to its customers’ equity orders and related supervisory failures that spanned from October 2016 to November 2017.

FINRA found that for more than a year, Robinhood routed its customers’ non-directed equity orders to four broker-dealers, all of which paid Robinhood for that order flow.

FINRA Rule 5310 – Best Execution – requires firms to use reasonable diligence to ascertain the best market for the subject security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions.

FINRA member firms that route customer orders away for execution can satisfy their best execution obligations by conducting either an order-by-order review of execution quality or a “regular and rigorous review.” FINRA Rule 5310 enumerates a number of criteria for firms to evaluate in these reviews.

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