Massachusetts securities regulators filed a complaint on Wednesday against a wildly popular trading platform operated by Robinhood Financial LLC for failing to enforce controls on the company to aggressively market and protect investors.
In a 24-page complaint, the enforcement arm of the Massachusetts Securities Division said Robinhood failed to protect its customers and their property, violating state laws and regulations. Robinhood made Massachusetts investors aware of “unnecessary trading risks”, “falling too low of the standard this year” requiring broker-dealers to act in the best interests of their customers.
The Wall Street Journal first reported the state’s intention to file a complaint on Wednesday morning.
A Robinhood spokesperson said before the complaint was filed that the company would continue to work closely with all regulators.
“Robinhood has opened up financial markets to a new generation of people who were previously excluded,” she said. “We are committed to working for integrity, transparency and compliance with all applicable laws and regulations.”
Complaints from the office of William Galvin, secretary of the Commonwealth of Massachusetts, have sparked the latest round of scrutiny that popular brokerages have encountered in their short history. Since it was founded less than a decade ago, Robinhood has exploded in popularity, with more than 13 million customer accounts. Traders are drawn to a user-friendly platform that allows customers to trade securities like stocks.
But its explosive growth in recent years has made it the target of scrutiny from regulators. Last year, Robinhood agreed to pay $ 1.25 million to settle claims from the Financial Industry Regulatory Authority, which alleged that the company did not take steps to ensure it received the best price for a customer order Are getting. The company agreed to a settlement without admitting or denying the mistake.
The Massachusetts center has tactics over allegations that the company uses to engage customers, claiming that it “encourages customers to consistently use the platform” in what it calls “callification.” The complaint alleges that through the promise of free stock, push notifications and its signature digital confetti, Robinhood encourages “continued and repeated engagement with its application”. State regulators alleged that Robinhood allowed a client with no investment experience to trade more than 12,700 in just six months.
In another example, regulators pointed to the rollout of a new cash-management facility to Robinhood, with customers also being given waiting lists to arrive early. The complaint states that customers have been given the ability to improve their position on the waiting list by “tapping” a fake credit card in the app up to 1,000 times per day.
It is also alleged that Robinhood violated its own rules about option trading by approving customers to engage in practice without the necessary qualifications. Options allow traders to pay a relatively small amount for a larger return if their bets prove to be correct. In return, however, losses may increase if traders’ bets go wrong.
Like many brokerages, Robinhood makes money by a practice called payment for order flow, sending customer orders to trading firms in exchange for cash payments. According to the complaint, “Robinhood prioritized its revenue in the best interests of its customers” to encourage continued trading to inexperienced investors.
It also addresses recent results of Robinhood’s experience that prevent traders from accessing their accounts at different points this year. “Robinhood failed to adequately protect its customers and their assets” failed to implement policies and procedures designed appropriately to prevent and respond to the state.
A Robinhood spokesman has said that prior to this the platform has “worked hard to toughen our infrastructure, improve reliability and increase capacity” and continue to invest to ensure that its systems are busy trading Support customers in days. The company has previously stated that it is continuing to increase educational tools for customers.
In an interview, Mr. Galvin said his office has filed a complaint to protect young investors from Massachusetts. The platform, he said, “is not presented as a serious investment with substantial risk.”
He said, “It is presented as some type of game that you might be able to win.” The complaint estimates that in early December, Robinhood has about 500,000 customers in Massachusetts, with a total income of over $ 1.6 billion.
The Massachusetts regulator, under Mr. Galvin, has been known to take a tight line against financial companies, previously investigating against Charles Schwab Corp. and Fidelity Investments.
But, the complaint against Robinhood is centered in part, what the regulator says is a violation of the company’s state new fiduciary rule, which it began enforcing in September. The complaint marked the first enforcement action of Mr. Galvin’s rule.
The regulation stipulates that a broker-dealer has a duty of loyalty to its customers, who prioritize the interests of the customers regardless of the interests of another party. Regulators state that the list of popular trades to which users have access has the potential to affect the securities that traders buy, without the company conducting a “suitability analysis” of those investments.
According to the complaint, “this is different from handing over a list of securities to a customer by a broker-dealer agent, surprising the customer to purchase securities from that list, and then declaring that the customer has no recommendations.”
Among other solicited reliefs, Massachusetts regulators require Robinhood to review its infrastructure in response to a platform outage and extend its policies to approve users for option trading. The complaint also states that an administrative penalty should be imposed on Robinhood.
Write Caitlin McCabe at [email protected]
Copyright © 2020 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8