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NEW THIS MONTH @ THINKADVISOR.COM TECHCENTER LIVE EVENTS WEB EXTRAS DIRECTORIES BLOGS

SEC Fines Robinhood $65M for Misleading Investors,
Best Execution Failures

Robinhood has agreed to pay customers’ needs.” gate, deprived customers of $34.1 million
a $65 million civil penalty Robinhood is “fully even after factoring in the savings from
to settle allegations by the transparent in our com- not paying a commission.
Securities and Exchange munications with cus- Robinhood made the alleged false and
Commission that it repeated- tomers about our cur- misleading statements in question during
ly failed to disclose its receipt rent revenue streams, the time in which it was growing rapidly,
of payments from trading have significantly the SEC said.
firms for routing client orders improved our best execu- “Robinhood provided misleading
to them, and also failing to sat- tion processes, and have information to customers about the true
isfy its duty to seek the best reason- established relationships with costs of choosing to trade with the firm,”
ably available terms to execute customer additional market makers to improve according to Stephanie Avakian, direc-
orders, the SEC said in December. execution quality,” a Robinhood spokes- tor of the SEC’s Enforcement Division,
The settlement was announced the day person told Investment Advisor. who left the agency at the end of 2020.
after Massachusetts’ top securities regula- “Brokerage firms cannot mislead custom-
tor, William F. Galvin, accused Robinhood More Details ers about order execution quality,” she
of violating state law by using overly “One of Robinhood’s primary selling said in announcing the settlement.
“aggressive tactics to attract new, often points was that it did not charge its “Robinhood failed to seek to obtain the
inexperienced, investors” and “gamifica- customers trading commissions,” the best reasonably available terms when
tion to encourage and entice continuous SEC said in its order. “In reality, however, executing customers’ orders, causing
and repetitive use” of its mobile applica- ‘commission free’ trading at Robinhood customers to lose tens of millions of
tion. Robinhood denied those allegations. came with a catch: Robinhood’s custom- dollars,” Joseph Sansone, chief of the
In an order filed by the SEC, the regula- ers received inferior execution prices SEC Enforcement Division’s Market
tor said that, between 2015 and late 2018, compared to what they would have Abuse Unit, said in a statement. “Today’s
Robinhood made misleading statements received from Robinhood’s competitors,” action sends a clear message that the
and omissions in customer communi- the regulator added. Commission will not allow brokers to
cations, including in FAQ pages on its “For larger value orders, this price ignore their obligations to customers.”
website, about its largest revenue source difference at Robinhood exceeded the Without admitting or denying the SEC’s
when describing how it made money — commission its competitors would claims, Robinhood agreed to a cease-and-
namely, payments from trading firms in have charged,” the SEC alleged, adding: desist order prohibiting it from violating the
exchange for Robinhood sending its cus- “These inferior prices were caused in antifraud provisions of the Securities Act of
tomer orders to those firms for execution, large part by the unusually high amounts 1933 and the recordkeeping provisions of
also known as payment for order flow. Robinhood charged the principal trad- the Securities Exchange Act of 1934.
“The settlement relates to historical ing firms for the opportunity to obtain Robinhood also agreed to be censured
practices that do not reflect Robinhood Robinhood’s customer order flow.” by the SEC and retain an independent
today,” said Dan Gallagher, chief legal offi- Despite that, Robinhood falsely consultant to review its policies and
cer at Robinhood and a former SEC com- claimed in a website FAQ between procedures relating to customer com-
missioner. “We recognize the responsibil- October 2018 and June 2019 that its munications, payment for order flow, and
ity that comes with having helped millions execution quality matched or beat that of best execution of customer orders, and
of investors make their first investments, its rivals, the SEC’s order alleged. to ensure that Robinhood is effectively
and we’re committed to continuing to The order found that Robinhood pro- following those policies and procedures,
evolve Robinhood as we grow to meet our vided inferior trade prices that, in aggre- the SEC said. —Jeff Berman
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