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Regulation and Compliance > Federal Regulation > SEC

SEC Fines Robinhood $65M for Misleading Investors, Best Execution Failures

By Jeff Berman

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Robinhood has agreed to pay a $65 million civil penalty to settle allegations by the Securities and Exchange Commission that it repeatedly failed to disclose its receipt of payments from trading firms for routing client orders to them, and also failing to satisfy its duty to seek the best reasonably available terms to execute customer orders, the SEC said Thursday.

The settlement was announced the day after Massachusetts’ top securities regulator, William F. Galvin, 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. Robinhood denied those allegations.

In an order filed by the SEC on Thursday, the regulator said that, between 2015 and late 2018, Robinhood made misleading statements and omissions in customer communications, including in FAQ pages on its website, about its largest revenue source when describing how it made money — namely, payments from trading firms in exchange 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 officer at Robinhood and a former SEC commissioner. “We recognize the responsibility 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 customers’ needs.”

Robinhood is “fully transparent in our communications with customers about our current revenue streams, have significantly improved our best execution processes, and have established relationships with additional market makers to improve execution quality,” a Robinhood spokesperson told ThinkAdvisor.

More Details

“One of Robinhood’s primary selling points was that it did not charge its customers trading commissions,” the SEC said in its order. “In reality, however, ‘commission free’ trading at Robinhood came with a catch: Robinhood’s customers received inferior execution prices compared to what they would have received 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 trading 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 provided inferior trade prices that, in aggregate, deprived customers of $34.1 million even after factoring in the savings from not paying a commission.

Robinhood made the alleged false and misleading statements in question during the 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, director of the SEC’s Enforcement Division.  “Brokerage firms cannot mislead customers 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 communications, 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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