The Financial Industry Regulatory Authority has slapped Robinhood Financial with “record financial penalties” over the firm’s alleged use of false and misleading information in communications with its customers, among other issues.
Finra ordered Robinhood to pay a $57 million fine and $12.6 million in restitution to “thousands of harmed customers” to settle the allegations. The firm agreed to the settlement without admitting or denying Finra’s findings.
“Compliance with [Finra’s] rules is not optional and cannot be sacrificed for the sake of innovation or a willingness to ‘break things’ and fix them later,” Jessica Hopper, head of Finra’s department of enforcement, says in a statement.
“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,” she adds.
The penalty is $7 million more than the previous highest sanction imposed by Finra, which was a $50 million fine of Credit Suisse in 2002 over the firm’s practices around its distribution of shares in initial public offerings, according to data from the self-regulator.
According to Finra, Robinhood provided an array of critical misinformation to customers since 2016, such as whether customers could trade on margin, how much cash was in their accounts, the risks posed by certain options trades and whether customers faced margin calls, which were sometimes erroneously issued.
In one instance highlighted by Finra, a customer who took his own life last June expressed confusion in a note found after his death as to how he could have used margin to buy securities, because he thought he had turned that option off in his account.
The firm also failed to do its due diligence before approving customers to place options trades, a service Robinhood began offering in December 2017, Finra says. Consequently, the firm approved for options trading thousands of customers who should not have been eligible or whose accounts had red flags, according to Finra.
The settlement agreement also addresses a series of outages that have affected Robinhood’s service, which Finra says reflect failures by the firm to reasonable supervise the technology it used as broker to accept and execute orders. Finra says it is requiring Robinhood to pay $5 million in restitution to customers who were unable to make trades during these outages.
Additionally, Robinhood didn’t report all its customer complaints to Finra as it was required to, the industry’s self-regulator alleges. The firm failed to report complaints about false and misleading information Robinhood may have provided customers, and about its outages and system failures, Finra says.
A spokesperson for Robinhood tells FA-IQ that the firm "has invested heavily in improving platform stability, enhancing our educational resources, and building out our customer support and legal and compliance teams. We are glad to put this matter behind us and look forward to continuing to focus on our customers and democratizing finance for all.”
Editor's Note: This article was originally published as a breaking news article on Jun. 30, 2021.
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