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Sen. Warren Calls on FINRA to Investigate Robinhood

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Elizabeth Warren (Credit: Warren's official Senate photo) Sen. Elizabeth Warren, D-Mass. (Official Senate photo)

Sen. Elizabeth Warren, D-Mass., prodded Robert Cook, CEO of the Financial Industry Regulatory Authority, Thursday in a letter to “conduct a thorough review” of Robinhood’s activities during the GameStop trading frenzy.

In her letter, Warren also asked Cook to explain how FINRA will respond to Robinhood’s role “in recent market volatility, its decision to cut off customers’ trading, and the broader concerns about market fairness that these events represent.”

“Given several findings that Robinhood violated rules governing broker-dealers and lacked systems to ensure their compliance with those rules, the public deserves to understand what steps FINRA has taken to ensure future compliance by Robinhood, whether Robinhood improved its systems and compliance in response to the many complaints filed by regulators and lawmakers, and whether continued violations of market rules may have contributed to the company’s role in recent market swings,” Warren wrote.

In a blog post on Jan. 29, Robinhood stated that it “limited buying in volatile securities to ensure it complied with deposit regulations,” not because it wanted to stop investors from buying certain stocks.

The amount required by clearinghouses “to cover the settlement period of some securities rose tremendously” during the week of Jan. 25, it said.

Relationships between trading platforms and large financial institutions like Citadel, largely through payment for order flow arrangements, may be misaligning brokerage industry incentives, Warren said.

“I am concerned that current oversight of broker-dealers does not sufficiently prevent conflicts of interest caused by payment for order flow, particularly with respect to the relationship between broker-dealers and market makers,” Warren wrote.

FINRA should also review “the potential harm that payment for order flow practices may pose to consumers, the adequacy of existing FINRA regulations and guidance, and potential regulatory or legislative solutions to reduce conflicts of interest that weaken brokers’ obligations to investors,” Warren told Cook.

Other troubling practices: Robinhood’s inclusion of forced arbitration clauses in its customer agreement, Warren wrote, “which state that in using the app, users and Robinhood ‘are giving up the right to sue each other in court … except as provided by the rules of the arbitration forum,’ and that any ‘controversy or claim’ between Robinhood and the user are required to be brought before FINRA Dispute Resolution.”

In a letter to Warren on Feb. 12, a lawyer for Robinhood said the company would be open to reviewing its mandatory arbitration policy.

Warren asked Cook to respond to a host of questions by Feb. 22, including the broker-dealer regulator’s mention in its recent exam report of a heightened focus on “game-like” digital platforms.

“Robinhood has been criticized for its contribution to the gamification of securities trading,” Warren said.


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