Robinhood FINRA Settlement: Broker to Pay $29.75M for Violations

Robinhood Markets, Inc. (“Robinhood”), an electronic trading platform known for offering commission-free trading via its mobile app, has agreed to pay a $26 million settlement to the Financial Industry Regulatory Authority (“FINRA”) over accusations that it failed to address warning signs of potential misconduct and did not verify the identities of thousands of its customers.  The company must also pay $3.75 million in restitution to customers.  Robinhood did not admit or deny the claims.

This settlement follows a separate $45 million agreement in January between two Robinhood subsidiaries, Robinhood Securities and Robinhood Financial, and the U.S. Securities and Exchange Commission (“SEC”).  The SEC had accused Robinhood of a variety of misconduct, including the failure to preserve records and the failure to timely report suspicious activity.

Head of Enforcement at FINRA, Bill St. Louis, said in a statement that the settlement “reminds Finra members that compliance with core regulatory obligations remains critical to safeguarding and serving all investors.”

One of the key allegations against Robinhood concerned its lack of oversight of social media influencers who were paid to promote the app’s services.  According to FINRA, some of the social media content misled investors.  Moreover, Robinhood allegedly did not comply with reporting obligations, specifically in providing blue sheet data, which is necessary for regulatory investigation into suspicious trading activities.

Another key allegation claimed Robinhood provided unclear information regarding the terms and conditions of a mechanism it used to shield customers from volatile stock prices.  This mechanism, known as “collaring,” prevented Robinhood users from buying or selling stocks if their prices changed by more than 5% between placing and executing a trade.  However, according to FINRA, customers often received less favorable prices when they re-entered their orders.

“We are pleased to resolve these historical matters, many of which date as far back as 2014, and which Robinhood Securities and Robinhood Financial have since remediated,” said Erica Crosland, Robinhood’s head of regulatory enforcement and investigations.

Even before going public, Robinhood often found itself in the spotlight for failing to abide by FINRA regulations.  In December 2020, Robinhood agreed to pay $65 million to the SEC to settle claims that it failed to properly disclose that it sold customers’ stock orders to high frequency traders and other firms.  In 2021, FINRA imposed an almost $70 million fine on the company, alleging that Robinhood misled its customers about margin trading and failed to adequately oversee its technology and options trader approvals.

How does FINRA protect investors from brokerage misconduct?

According to its Enforcement Priorities, FINRA is dedicated to identifying misconduct, stopping fraud, and obtaining restitution for harmed investors.  To that end, FINRA employs a variety of strategies to reduce the risk of harm to investors.  These strategies include “assessments of applications member firms file to retain or employ an individual subject to a statutory disqualification, reviews of membership and continuing membership applications, disclosure of brokers’ regulatory backgrounds, supervision requirements, focused examinations, [and] risk monitoring and disciplinary actions.”

Moreover, FINRA has a number of rules to ensure compliance and prevent fraud.   For example, Rule 3310 requires member firms to develop and implement anti-money laundering programs, and Rule 3110 requires firms to establish supervisory systems in order to maintain compliance with laws and regulations.

FINRA’s BrokerCheck tool can aid in researching the background and experience of a financial institution.  BrokerCheck provides easy access to investment advisor information, facilitating investors in making informed decisions about brokers and brokerage firms.

What are the most common FINRA violations for brokerage firms?

Common FINRA violations include recommending securities transactions or investment strategies that are not in the best interest of a customer, switching customers from one mutual fund to another without a legitimate investment reason, misrepresenting or failing to disclose material facts regarding an investment, and charging customers excessive commissions.  Such violations undermine investor confidence and market integrity.

How can financial institutions ensure FINRA compliance?

It is vital for financial institutions to remain up to date on FINRA regulations in order to ensure compliance.  Compliance solution companies recommend strategies like conducting regular compliance audits, implementing comprehensive training programs, and establishing a strong supervisory system to safeguard against non-compliance.

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