Robinhood to pay $70M in record settlement with FINRA

Robinhood has agreed to pay nearly $70 million to settle a regulatory investigation into allegations that it misled customers, failed to appropriately vet certain traders, and didn’t supervise technology leading to outages for millions of users.

The Financial Industry Regulatory Authority announced the settlement on Wednesday, calling it “the largest financial penalty ever ordered by FINRA.”

FINRA said that Robinhood will pay $57 million as a fine and $12.6 million to compensate “thousands of harmed customers.”

It’s a blow to the rapidly growing commission-free trading app that’s been both hailed for increasing access to the stock market by removing fees as well as criticized for gamifying the market.

In announcing the settlement Wednesday, FINRA said Robinhood made a number of false and misleading statements to customers since 2016, including whether customers could place trades on margin and how much money was in users’ accounts.

“For instance, one Robinhood customer who had turned margin ‘off,’ tragically took his own life in June 2020,” FINRA wrote in announcing the agreement.

In January, Robinhood restricted users from buying GameStop shares amid a market feeding frenzy.
In January, Robinhood restricted users from buying GameStop shares amid a market feeding frenzy.
AP/John Minchillo

“In a note found after his death, he expressed confusion as to how he could have used margin to purchase securities because, he believed, he had not ‘turned on’ margin in his account.”

Trading on margin is which is when people use borrowed money to trade.

FINRA also said that Robinhood failed to appropriately review and authorize users who applied to use a potentially more risky form of trading called options trading, in which people buy contracts that give the holder the right to buy or sell a security at a future date.

The watchdog said the company approved thousands of users for options trading who either should not have been eligible or whose accounts contained red flags.

And finally, FINRA found that the company did not appropriately supervise the technology it uses to execute orders — leading to outages, especially at times of extreme market volatility.

Robinhood neither admitted nor denied the charges as part of its settlement agreement.

“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,” said Jessica Hopper, Executive Vice President and Head of FINRA’s Department of Enforcement.

“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 fine imposed in this matter, the highest ever levied by FINRA, reflects the scope and seriousness of Robinhood’s violations, including FINRA’s finding that Robinhood communicated false and misleading information to millions of its customers,” she added.

The settlement announced Wednesday trumps even the $65 million fine Robinhood had to pay the Securities and Exchange Commission last year for misleading users about how it was making money and failing to deliver the best execution it had promised on trades.

Vlad Tenev is the co-CEO and co-founder of Robinhood.
Vlad Tenev is the co-CEO and co-founder of Robinhood.
REUTERS/Brendan McDermid/

“Robinhood has invested heavily in improving platform stability, enhancing our educational resources, and building out our customer support and legal and compliance teams,” Jacqueline Ortiz Ramsay, a spokeswoman for Robinhood, said.

“We are glad to put this matter behind us and look forward to continuing to focus on our customers and democratizing finance for all.”

Robinhood, which is expected to file to go public sometime this year, attracted millions of new users during the pandemic as interest in the stock market reached record levels. Its expected initial public offering is one of the most anticipated of the year.

Separately, FINRA announced on Wednesday that it will launch a $30 million campaign to better educate new investors who use apps like Robinhood.

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