Close Close
ThinkAdvisor

Regulation and Compliance > Federal Regulation > FINRA

Robinhood Under FINRA Investigation, Again

X
Your article was successfully shared with the contacts you provided.

What You Need to Know

  • Robinhood disclosed that FINRA sent it an investigative request over the non-registration status of the firm's CEO and co-founder.
  • Robinhood is evaluating the investigation and plans to cooperate, it said.
  • One main question is whether Vlad Tenev has de facto control of Robinhood brokerage activities as CEO.

The Financial Industry Regulatory Authority is investigating Robinhood CEO Vlad Tenev and co-founder Baiju Bhatt because they have not registered with FINRA, Robinhood disclosed in a filing with the Securities and Exchange Commission on Tuesday, just two days before its stock debuted Thursday on the Nasdaq.

Robinhood received the FINRA investigative request “seeking documents and information related to its compliance with FINRA registration requirements for member personnel, including related to the FINRA non-registration status of Mr. Tenev and Mr. Bhatt,” the company said in its SEC filing.

“Robinhood is evaluating this matter and intends to cooperate with the investigation,” the company said, also pointing to several of the lawsuits it was currently the defendant in.

FINRA already fined the firm $57 million and ordered it to pay about $12.6 million in restitution, plus interest, in June to what FINRA said were “thousands of harmed customers.”  Those  harmed included millions of Robinhood 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,” FINRA said.

Robinhood’s stock, with the ticker HOOD, debuted Thursday at $38 a share, valuing the company at about $32 billion. The stock was trading near that level Thursday afternoon.

Initial Reactions

In a tweet on Wednesday referring to the FINRA investigation, Lisa Braganca, a former SEC branch chief, said: “IMHO question is whether [Tenev] has de facto control of brokerage activities via his role as CEO.”

Criticizing FINRA, William Whitt, senior analyst at Aite-Novarica Group, told ThinkAdvisor by email: “I think the FINRA inquiry into non-registration of Mr. Tenev and Mr. Bhatt shows poor judgment from FINRA as to timing. FINRA has been well aware of their non-registration status for quite some time, yet they only choose to pursue an investigation now, 2 days before the IPO? The optics are terrible, and FINRA in this case comes off looking like a petulant child.”

However, “regardless of the optics, I think this case will have zero impact on the IPO, as I don’t believe the retail investors receiving an IPO allocation will really care about this, nor do I think this case would affect the institutional investors’ views about the merits of the IPO,” Whitt added.

Of more potential concern for Robinhood is the earlier ongoing investigation by “regulators at all levels,” including FINRA and the SEC, related to employee trading in securities subject to early 2021 trading restrictions, which is “a little more serious,” he said. That case, “assuming it has merits, is reflective of a larger issue at Robinhood, which is the very poor internal controls they have, and in a worst case scenario they are probably looking at a fine of a couple hundred million dollars,” he said.

FINRA’s Rules

FINRA declined to comment Wednesday, noting that, “as a matter of policy, FINRA does not comment on investigations.”

However, in a letter to Sen. Elizabeth Warren, D-Mass., on Feb. 23, Robert W. Cook, the industry self-regulator’s CEO and president, said: “FINRA rules require generally that individuals associated with a FINRA member and engaged in the investment banking or securities business of the member be appropriately registered with FINRA as a ‘principal’ or ‘representative.’”

The term “principal” is defined by FINRA rules as “any person associated with a member, including, but not limited to, sole proprietor, officer, partner, manager of office of supervisory jurisdiction, director or other person occupying a similar status or performing similar functions, who is actively engaged in the management of the member’s investment banking or securities business, such as supervision, solicitation, conduct of business in securities or the training of persons associated with a member for any of these functions,” it explained.

And the term “representative” is defined by FINRA rules as “any person associated with a member, including assistant officers other than principals, who is engaged in the member’s investment banking or securities business, such as supervision, solicitation, conduct of business in securities or the training of persons associated with a member for any of these functions,” it noted.

A FINRA member firm’s CEO and chief financial officer, or individuals who are the “functional equivalent of a member firm’s CEO or CFO, are considered principals under FINRA rules,” it pointed out.

Other senior or executive managers of a member firm, including its officers, “may be considered principals either because they are persons associated with the member who are actively engaged in the management of the member’s investment banking or securities business or because they are performing a function, such as the head of a business unit, that is required to be performed by a principal of the member,” it added.

Cook’s letter was in response to Warren’s Feb. 16 letter asking him to “conduct a thorough review” of Robinhood’s activities during the GameStop trading frenzy.

Some questions in Warren’s letter were related to Tenev’s registration status.

“Reports indicate that ‘Robinhood CEO Vlad Tenev is not licensed by FINRA, Wall Street’s powerful self-regulator, even though he presides over one of the nation’s largest and most powerful online brokers’ and that ‘FINRA generally requires that the CEOs of registered broker-dealers be registered with the agency,’ which ‘allows the public to track any violations of licensed individuals,’” Warren said.

In addition, “[n]one of Tenev’s direct reports appear to be registered with FINRA,” Warren said, asking Cook to “describe what determines whether individuals must be registered with FINRA” and “describe FINRA policies related to registration requirements for executives at companies registered as broker-dealers.”

(Image: Shutterstock)