The Financial Industry Regulatory Authority (FINRA) on Wednesday levied $57 million in fines against Robinhood Financial LLC. It also ordered $12.6 million in restitution for thousands of “harmed customers” for the trading platform’s “systemic supervisory failures.” Collectively, these sanctions represent the largest that FINRA has ordered on a member firm to date.
FINRA asserts that in determining appropriate sanctions, it sought to send a message to member firms. Authorities “considered the widespread and significant harm suffered by customers, including millions of customers who received false or misleading information from the firm,” in addition to the millions who were affected by Robinhood’s systems outages in March 2020, and the “thousands of customers the firm approved to trade options even when it was not appropriate for the customers to do so.”
A 123-page filing details Robinhood’s “false and misleading communication to customers” contrary to FINRA Rules 2210 and 2220, which outline content standards for member firms’ communications with their customers. FINRA Rule 2210 requires, among other things, that communications be “fair and balanced” and that they do not contain any “false, exaggerated, unwarranted, promissory or misleading statement or claim” or omit “any material fact . . . if the omission, in light of the context of the material presented, would cause the communications to be misleading.” FINRA Rule 2220 addresses member firms’ communications about options trading, requires firms to avoid “broad generalities” regarding the risks of options trading, and prohibits making “any untrue statement or omission of a material fact” or any statement that “is otherwise false or misleading,” or that “fails to reflect the risks attendant to options transactions and the complexities of certain options investment strategies.” Rule 3110 outlines requirements for firms to establish and maintain appropriate supervisory systems.
In FINRA’s press release, it stated Robinhood “failed to reasonably supervise the operation and maintenance of its technology, which, as a FinTech firm, Robinhood relies upon to deliver core functions, including accepting and executing customer orders,” and its “erroneous margin calls and margin call warnings to over 100,000 customers,” among an array of other misconduct.
During the pandemic, Robinhood experienced difficulty meeting increased demands for its free platform and services. It has also faced significant criticism from legal, regulatory, and financial parties for its alleged part in driving the “gamification” of investing among Reddit forum users and “meme-stock” buyers, many of which are inexperienced traders. In spite of this, the company has increased its user base and filed for a confidential initial public offering on March 23, 2021.
