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Robinhood to pay $70 million in record settlement with FINRA

·Senior Writer/Chief-of-staff
·4 min read
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The Financial Industry Regulatory Authority announced that it fined Robinhood $57 million and ordered the online brokerage to pay approximately $12.6 million in restitution, plus interest, to thousands of customers for a total settlement of $70 million.

"The sanctions represent the largest financial penalty ever ordered by FINRA and reflect the scope and seriousness of the violations," the authority wrote, noting "significant harm" to "millions of customers who received false or misleading information from the firm, millions of customers affected by the firm’s systems outages in March 2020, and thousands of customers the firm approved to trade options even when it was not appropriate for the customers to do so."

Robinhood experienced several outages last year, starting in March, particularly on days of high trading volumes. (To be clear, the settlement is not related to the so-called meme-stock frenzy of early 2021 when, at one point, Robinhood temporarily restricted customers from buying shares of several companies, including GameStop.)

This is a notable step in the meteoric growth of Robinhood, the stock trading app that some argue helped popularize retail trading among novice investors. The company's introduction of free trades forced other brokerages to respond with zero-cost trades to stay competitive. That swashbuckling attitude that changed the industry, however, was exactly what FINRA impugned. Following the rules, the agency argued, is paramount in the industry.

FILE - This  Dec. 17, 2020 file photo shows the logo for the Robinhood app on a smartphone in New York.  The online trading platform Robinhood is moving to restrict trading in GameStop and other stocks that have soared recently due to rabid buying by smaller investors.    (AP Photo/Patrick Sison)
The Robinhood app on a smartphone in New York. (AP Photo/Patrick Sison)

"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,” Jessica Hopper, Executive Vice President and Head of FINRA’s Department of Enforcement, said in FINRA's press release.

(Though Robinhood "accepted" the settlement, it did not officially admit or deny the allegations.)

Robinhood says it has fixed most of the problems

The settlement will no doubt embolden Robinhood's critics, but it also represents catharsis for the company as it grows up — and looks toward a long rumored and anticipated IPO. Robinhood said it has taken “numerous remedial measures” to address FINRA's charges, detailing them in a "corrective action statement" attached to the FINRA release.

“Robinhood has invested heavily in improving platform stability, enhancing our educational resources, and building out our customer support and legal and compliance teams,” Robinhood said in a statement to Yahoo Finance. “We are glad to put this matter behind us and look forward to continuing to focus on our customers and democratizing finance for all.”

The company said it had completed the “restructuring and enhancement of its legal, compliance, and anti-fraud functions; strengthening of its supervisory structure and written supervisory procedures, including with respect to supervision of technology; expansion of customer support, including with respect to options and margin trading; remediation of certain customer communications and data displays at issue in the AWC; and improved supervision of options trading.”

Vlad Tenev, CEO of Robinhood Markets, is seen testifying in a frame grab from video during an entirely virtual hearing of the U.S. House of Representatives Committee on Financial Services entitled ?Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide??, in Washington, U.S., February 18, 2021.   House Committee on Financial Services/Handout via Reuters
Vlad Tenev, CEO of Robinhood Markets, testfiies during an entirely virtual hearing of the U.S. House of Representatives Committee on Financial Service in Washington, U.S., February 18, 2021. House Committee on Financial Services/Handout via Reuters

These past issues, fixed, grabbed significant headlines over the past couple years, and Robinhood's image rehabilitation as a smoothly functioning platform is still wounded in many quarters.

In its action, FINRA mentions Alex Kearns, the Robinhood customer who died by suicide believing he had lost a significant amount of money on options. FINRA said it found that the firm "negligently communicated false and misleading information to its customers" about how much cash was on hand in customer accounts, risks of loss, margin calls, and more.

"Robinhood also displayed to this individual (and certain other customers) inaccurate negative cash balances," FINRA wrote, noting this caused customers to lose $7 million. Furthermore, some of these customers who used options may not have been supposed to trade them but were approved due to bad technology.

FINRA pointed to further bad tech that caused outages, saying that the company did not have a business continuity plan during its outages from January 2018 to February 2021, with the "most serious outage" occurring on March 2 and March 3. "Robinhood’s inability to accept or execute customer orders during these outages resulted in individual customers losing tens of thousands of dollars, and FINRA is requiring that the firm pay more than $5 million in restitution to affected customers," FINRA wrote.

Robinhood Markets had planned to go public last month but its IPO was delayed because of questions from the SEC about its prospectus, Bloomberg reported.

Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, personal finance, retail, airlines, and more. Follow him on Twitter @ewolffmann.

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