• Thu. Feb 29th, 2024

Robinhood Reaches Settlement with SEC for $65 Million

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Dec 18, 2020
Popular stock trading app, Robinhood was put under some major scrutiny this week after some of its technical and marketing practices. Even though the company still has a lot of things to answer

Popular stock trading app, Robinhood was put under some major scrutiny this week after some of its technical and marketing practices. Even though the company still has a lot of things to answer to, they have managed to put off a potential case from the US Securities and Exchange Commission (SEC). Instead, a settlement agreement worth $65 million has been made between Robinhood and the SEC regarding misleading communication with their millennial customers. Robinhood had been accused by the SEC due to omissions and misleading statements regarding their fee structure, which prompted a number of unsuspecting traders to opt in for its services.

The most prominent issue for the SEC was that the company had advertised itself as a trading service that doesn’t charge any commission, while they were using market makers’ inferior execution prices and passing them off to customers. The agency highlighted that Robinhood had engaged in this activity between 2015 and 2018 and it had managed to rake in $34.1 million from its clients. The SEC’s statement said that the most notable selling point of Robinhood was that it didn’t charge any commission from its clients. However, there was a catch and that was inferior execution prices, as compared to what they were being offered by Robinhood’s competitors. 

The Exchange Act of the SEC doesn’t prohibit firms like Robinhood to receive payments for directing orders via principal trading firms. However, these companies have a fiduciary responsibility for acting in the best interests of their customers. According to the SEC’s allegations, Robinhood had deliberately concealed this information from its clientele. It pitched itself as a commission-free platform and did not disclose the hidden costs to its customers. The California-based company had a financial incentive for acting this way, as order flow payments contribute a significant chunk of their revenues. 

A similar challenge is being faced by Robinhood from the Massachusetts Securities Division’s enforcement arm. On Wednesday, the financial regulator had informed Wall Street Journal that they would be filing a complaint against Robinhood due to its marketing tactics, which were deliberately misleading. According to the report, the regulators had unearthed substantial evidence that ill-experienced investors were being deliberately targeted by the company. They had used substandard marketing materials, and they opened up the users of the company to significant risks. The Commonwealth of Massachusetts’ secretary, William Galvin spoke to CNBC and said that their office didn’t like how the idea of investment was gamified by Robinhood.

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He stated that these tactics indicated that the company was obsessed with growth and it didn’t have any qualms about exposing its users to risks. The service outages of Robinhood will also be addressed by the suit filed by the Massachusetts regulators, as these have cost the users of the firm rather dearly. In 2020 alone, there have been no less than three service outages that have occurred at Robinhood. One of the firm’s subsidiaries, Robinhood Markets has also suffered a hack that caused contact details of more than 2,000 customers to be exposed.

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