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FINRA Orders Record $70 Million Financial Penalty For Systemic Supervisory Failures
07/07/2021On June 30, 2021, the Financial Industry Regulatory Authority (FINRA) ordered Robinhood Financial LLC (“Robinhood”) to pay a $57 million fine, the highest financial penalty ever ordered in FINRA history, for supervisory failures. Robinhood will also pay an additional $12.6 million of restitution to users. In announcing the severe penalty, FINRA attributed it to the “widespread and significant harm suffered by … millions of customers” as a result of Robinhood’s various “systemic supervisory failures.” Without admitting to the allegations, Robinhood consented to FINRA’s findings and stated that it has “invested heavily in improving platform stability, enhancing our educational resources, and building out our customer support and legal and compliance teams.”
In announcing the action, The Head of FINRA’s Department of Enforcement, Jessica Hopper, stated, “This action sends a clear message—all FINRA member firms, regardless of their size or business model, must comply with the rules that govern the brokerage industry, rules which are designed to protect investors and the integrity of our markets. Compliance with these rules is not optional and cannot be sacrificed for the sake of innovation or a willingness to ‘break things’ and fix them later.”
The Letter of Acceptance, Waiver, and Consent signed by Robinhood recounted several significant allegations. FINRA found that Robinhood had negligently provided false and misleading information to its customers in several areas, including whether customers could place trades on margin, how much cash was in customers’ accounts, the amount of “negative buying power” customers had, and whether customers faced margin calls. One example of such misleading information that has received a large amount of media attention involved a twenty-year-old Robinhood user who committed suicide after losing $730,000 on options trading despite turning his margin to “off” through Robinhood’s platform. In his suicide letter, the user expressed confusion as to how he could have incurred such losses because, he believed, he had not “turned on” margin in his account. FINRA alleges that many other Robinhood customers suffered millions in total losses as a result of similar misstatements. Robinhood is required to pay restitution to these customers as part of the order.
Additionally, FINRA found that Robinhood failed to exercise due diligence before approving customers to place options trades. Robinhood allegedly relied on algorithms and bots to approve options trading, with minimal oversight by firm principals. Those bots often used inconsistent or illogical information to approve customers to trade options. This resulted in Robinhood approving thousands of customers for options trading who did not satisfy the firm’s eligibility criteria, including customers whose accounts contained red flags indicating that options trading was inappropriate for them.
Finally, the order found that Robinhood failed to reasonably supervise its core broker-dealer services technology, such as the technology used for accepting and executing customer orders. From 2018 to 2020, Robinhood experienced multiple outages and systems failures. The most serious outage occurred from March 2-3, 2020, when Robinhood’s app fully shut down, preventing its customers from accessing their accounts during a time of substantial market volatility. FINRA accused Robinhood of failing to report thousands of written customer complaints that it was required to report to FINRA—many of which were complaints regarding the above issues, including the provision of false and misleading information and losses suffered as a result of outages and system failures.
Robinhood, like many other apps and modern financial services, has gained its reputation and success in large part due to its promise to “disrupt” the status quo of investment and financial services and provide opportunities for newcomers to invest. The historic penalty levied by FINRA sets an important and significant precedent for similarly situated services, making it clear that they will be subject to the same regulations as more traditional and longstanding financial institutions, rather than receiving slack from enforcement authorities due to their relatively young age, efforts to innovate, or because they focus on serving new or inexperienced investors.
