Industry regulators on Wall Street imposed a fine of US$70 million (approximately Rs 52.072 crore) on Robinhood on Wednesday for “systematic” failures, including system outages, provision of “false or misleading” information, and weak control over options trading, all of which said The combined factors have harmed the millions of dollars in the app’s customers.
The Financial Industry Regulatory Authority (FINRA) fines are the latest blow to Robinhood’s reputation. The broker has been praised for democratizing trading. Federal and state policymakers are reviewing it after this year’s meme stock fiasco raised questions about the California company’s business model, risk management, and customer treatment. .
However, this comprehensive agreement resolves a suspected FINRA violation that dates back to September 2016 and may pave the way for the company to quickly move forward with a planned initial public offering due to a memetic stock rebound and other regulatory inquiries And was postponed.
Robinhood and FINRA’s resolution included compensation of US$12.6 million (approximately Rs 93.73 crore) and US$57 million (approximately Rs 42.4 crore) in fines to thousands of customers. This is the largest fine in the history of regulators and covers A series of issues dating back to September 2016, FINRA said in a statement.
Jessica Hopper, FINRA’s Director of Enforcement, said: “The fine…reflects the scope and severity of Robinhood’s violations, including FINRA’s discovery that Robinhood has conveyed false and misleading information to millions of customers.”
According to FINRA, these communications are related to whether the customer can conduct margin trading, how much cash is in the account, how much purchasing power they have, the risk of loss faced by the customer in certain transactions, and whether the customer faces a margin call.
FINRA noted that a Robinhood customer ended his life in 2020 after being confused by messages in his account, which appeared to indicate that he had closed margin trading and incorrectly displayed a negative cash balance. FINRA stated that thousands of other customers suffered losses of more than US$7 million (approximately 520 million rupees) due to similar misstatements.
FINRA stated that between 2018 and the end of 2020, Robinhood also failed to properly monitor its technology, resulting in a “series of outages and critical system failures”, including a major outage during the pandemic storm in March 2020, resulting in The client loses money.
FINRA stated that during the same period, Robinhood also failed to properly vet its customers before allowing them to make risky alternative bets.
Robinhood neither admitted nor denied these allegations, but agreed with FINRA’s findings. The company said in a statement that it is overhauling its business, installing new supervision and communication procedures, and hiring a large number of lawyers, including previous regulators.
“There is a clear message: you can try to democratize investment and demystify finance, but you can’t take shortcuts,” said Robert Frenchman, lawyer of Mukasey Frenchman & Sklaroff, adding that the settlement should be good news for the IPO .
“This is good because it solves such a wide range of issues, and now they can say that they have reached a settlement with the regulator. I can see the value of resolving FINRA violations-it’s a lot of money.”
FINRA is a self-regulatory agency that reports to the U.S. Securities and Exchange Commission (SEC). In 2019, Robinhood imposed a fine of US$1.25 million (approximately Rs 93 crore) for order execution failure.
The SEC also targeted Robinhood and imposed a fine of $65 million (approximately Rs 4,835 million) on Robinhood last year to resolve allegations that it misled customers in terms of its source of revenue.
Nevertheless, Robinhood’s legal and regulatory dilemma is unlikely to end. The SEC is also considering new rules to control “gamification”, game-like features that encourage transactions, and order payment flows, that is, brokers send retail customer orders to wholesale brokers in exchange for fees-both of which are managed by Robinhood deploy.
Massachusetts Secretary of State Bill Calvin is also filing a lawsuit against the company. He said he was “happy” that FINRA was pursuing Robinhood’s misconduct, but questioned whether the $12.6 million in customer compensation was sufficient.
© Thomson Reuters 2021