William F. Galvin, Massachusetts’ top securities regulator, on Wednesday accused Robinhood of violating state law by using overly “aggressive tactics to attract new, often inexperienced, investors” and “gamification to encourage and entice continuous and repetitive use” of its mobile application.
It’s the first enforcement action brought under the state’s fiduciary rule, in force since September. Robinhood denies the charges.
In an administrative complaint filed in Boston, Galvin also hit the mobile and online trading firm for “failure to implement policies and procedures reasonably designed to prevent and respond to outages and disruptions on its trading platform.”
As a result of marketing tactics like using “the promise of free stock to attract new customers,” Robinhood’s customer base has grown significantly in recent years and those clients are incentivized to “use the platform constantly,” according to Galvin.
However, the company failed to keep up with its rapidly expanding client base, experiencing about 70 outages from the beginning of 2020 through the end of November, according to the complaint.
The trading platform had additional technical problems into December. For example, the platform experienced unspecified technical issues for a second straight day on the morning of Dec. 8, one day after it and Interactive Brokers each had outages.
One of the worst outages lasted for almost two days, March 2-3, and resulted in clients being unable to access their accounts on the day the Dow Jones Industrial Average saw its largest one-day gain to date, according to Galvin’s complaint.
Only one week later, Robinhood experienced another outage amid a stock market plunge, the complaint noted. That outage once again angered investors who said they were prevented from trading and capitalizing on the extreme market volatility just before the S&P 500 dropped more than 7% and triggered circuit breakers that temporarily stopped trading, as ThinkAdvisor reported.
Nearly every major online trading platform has experienced similar technical issues this year.
“We disagree with the allegations in the complaint by the Massachusetts Securities Division and intend to defend the company vigorously,” a Robinhood spokesperson told ThinkAdvisor Wednesday.
“Robinhood is a self-directed broker-dealer and we do not make investment recommendations,” she said, adding: “Over the past several months, we’ve worked diligently to ensure our systems scale and are available when people need them. We’ve also made significant improvements to our options offering, adding safeguards and enhanced educational materials.”
She went on to point out that “millions of people have made their first investments through Robinhood,” noting: “we remain continuously focused on serving them.”
The complaint also alleged Robinhood violated state law for “failure to follow its own written supervisory procedures regarding the approval of options trading” and “breach of the fiduciary conduct standard required” by state law.
Citing Robinhood’s data, the complaint said that the median age of a client using the firm’s trading platform is 31 years old and that about 68% of Massachusetts customers approved for options trading on Robinhood reported having limited or no investment experience.
As of this month, Robinhood had almost 500,000 Massachusetts clients whose accounts were valued at a total of more than $1.6 billion, according to the complaint.
“As a broker-dealer, Robinhood has a duty to protect its customers and their money,” Galvin said in announcing the complaint. “Treating this like a game and luring young and inexperienced customers to make more and more trades is not only unethical, but also falls far short of the standards we require in Massachusetts,” he added.
With the complaint, the Massachusetts Securities Division is seeking an administrative fine and an order requiring Robinhood to engage an independent compliance consultant to review its platform and infrastructure, as well as its policies and procedures.
— Related on ThinkAdvisor: