FINRA announced an order for Robinhood Financial LLC to pay a total of almost $70 million to its customers following a series of supervisory blunders and misleading information. It is the largest financial sanction FINRA has ordered to date and involves a $56 million fine along with $12.6 million in restitution to customers. The interest will have to be paid as well.
Robinhood is one of the leading investing apps in the US and quickly captured the hearts and minds of retail traders. Robinhood’s motto of “democratizing finance for all” attracted scores of amateur investors during a period of intense market volatility, creating a perfect storm in the financial world.
As per FINRA’s statement, Robinhood failed to communicate vital information to its customers. In addition, FINRA reports Robinhood communicated misleading information regarding essential trading information, including:
- how much cash was in customers’ accounts,
- customers’ remaining buying power, and
- whether customers would face margin calls.
Partly resulting from inaccurate reporting, one customer took his own life believing he had incurred astronomical losses from trading, the statement from FINRA revealed.
Another violation FINRA reported was the platform allowing customers to place options trades without reasonable due diligence.
Robinhood replaces many traditional brokerage practices in favor of algorithms that approve or deny trades. However, FINRA found these algorithms, or bots, were approving transactions that didn’t display logical trading patterns.
Ultimately, the bots were approving trades contrary to the firm’s own criteria for options trading and trades from accounts that didn’t have the conditions necessary to receive approval.
Perhaps the most public violation came in the form of platform outages from 2018 to 2020 ranging in severity. Robinhood experienced systems failures several times, failing to provide access for customers to complete trades during critical moments of market change.
Despite having a business continuity plan, FINRA found it was inadequate to address the system’s failures and required that Robinhood pay $5 million to customers in restitution.
Lastly, FINRA found that Robinhood was not reporting tens of thousands of customer complaints that clearly fall within the scope of required reporting. Robinhood’s internal policies excluded the complaints from reporting.
Robinhood consented to FINRA’s findings but hasn’t accepted or refuted any of the charges as of this writing.
