SEC Fines Robinhood $65M for Misleading Investors,Best Execution Failures
Robinhood has agreed to paya $65 million civil penaltyto settle allegations by theSecurities and ExchangeCommission that it repeatedly failed to disclose its receiptof payments from tradingfirms for routing client ordersto them, and also failing to satisfy its duty to seek the best reasonably available terms to execute customerorders, the SEC said in December.
The settlement was announced the dayafter Massachusetts’ top securities regulator, William F. Galvin, accused Robinhoodof violating state law by using overly“aggressive tactics to attract new, ofteninexperienced, investors” and “gamifica-tion to encourage and entice continuousand repetitive use” of its mobile application. Robinhood denied those allegations.
In an order filed by the SEC, the regulator said that, between 2015 and late 2018,Robinhood made misleading statementsand omissions in customer communications, including in FAQ pages on itswebsite, about its largest revenue sourcewhen describing how it made money —namely, payments from trading firms inexchange for Robinhood sending its customer orders to those firms for execution,also known as payment for order flow.
“The settlement relates to historical
practices that do not reflect Robinhood
today,” said Dan Gallagher, chief legal offi-
cer at Robinhood and a former SEC com-
missioner. “We recognize the responsibil-
ity that comes with having helped millions
of investors make their first investments,
and we’re committed to continuing to
evolve Robinhood as we grow to meet our
Robinhood is “fully
transparent in our com-
munications with cus-
tomers about our cur-
rent revenue streams,
improved our best execu-
tion processes, and have
established relationships with
additional market makers to improve
execution quality,” a Robinhood spokes-
person told Investment Advisor.
“One of Robinhood’s primary sellingpoints was that it did not charge itscustomers trading commissions,” theSEC said in its order. “In reality, however,‘commission free’ trading at Robinhoodcame with a catch: Robinhood’s customers received inferior execution pricescompared to what they would havereceived from Robinhood’s competitors,”the regulator added.
“For larger value orders, this price
difference at Robinhood exceeded the
commission its competitors would
have charged,” the SEC alleged, adding:
“These inferior prices were caused in
large part by the unusually high amounts
Robinhood charged the principal trad-
ing firms for the opportunity to obtain
Robinhood’s customer order flow.”
Despite that, Robinhood falsely
claimed in a website FAQ between
October 2018 and June 2019 that its
execution quality matched or beat that of
its rivals, the SEC’s order alleged.
The order found that Robinhood pro-
vided inferior trade prices that, in aggre-
gate, deprived customers of $34.1 million
even after factoring in the savings from
not paying a commission.
Robinhood made the alleged false andmisleading statements in question duringthe time in which it was growing rapidly,the SEC said.
“Robinhood provided misleading
information to customers about the true
costs of choosing to trade with the firm,”
according to Stephanie Avakian, direc-
tor of the SEC’s Enforcement Division,
who left the agency at the end of 2020.
“Brokerage firms cannot mislead custom-
ers about order execution quality,” she
said in announcing the settlement.
“Robinhood failed to seek to obtain the
best reasonably available terms when
executing customers’ orders, causing
customers to lose tens of millions of
dollars,” Joseph Sansone, chief of the
SEC Enforcement Division’s Market
Abuse Unit, said in a statement. “Today’s
action sends a clear message that the
Commission will not allow brokers to
ignore their obligations to customers.”
Without admitting or denying the SEC’s
claims, Robinhood agreed to a cease-and-
desist order prohibiting it from violating the
antifraud provisions of the Securities Act of
1933 and the recordkeeping provisions of
the Securities Exchange Act of 1934.
Robinhood also agreed to be censured
by the SEC and retain an independent
consultant to review its policies and
procedures relating to customer com-
munications, payment for order flow, and
best execution of customer orders, and
to ensure that Robinhood is effectively
following those policies and procedures,
the SEC said. —Jeff Berman
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