February 16, 2021
On December 17, 2020, the Securities and Exchange Commission (SEC) instituted cease-and-desist (C&D) proceedings against Robinhood Financial, LLC (Robinhood), a widely popular stock trading and investment app, for violating securities industry rules by misleading customers about revenue sources and failing to satisfy duty of best execution. Since its inception in 2015, Robinhood has become one of the world’s largest retail broker-dealers in the United States with 9 million approved customer accounts in June 2019.
Robinhood, as a broker-dealer that routed customers for trade execution, has a duty known as “best execution”: an obligation to seek to obtain the best reasonably available terms for customers’ orders. Since its inception, Robinhood’s primary and largest revenue source has been “payment order for flow,” the amount a broker dealer charges the principal trading firms for the opportunity to obtain its customer order flow. From September 2016 through June 2019, Robinhood was on notice by the SEC that its high payment for order flow rates from principal trading firms could result in inferior execution prices for its customers. Nonetheless, the company failed to conduct adequate consistent and stringent reviews of the execution quality it was providing on customer orders. The SEC asserts that Robinhood provided inferior trade prices that withheld $34.1 million in gains from its customers compared to competitors, even after considering its customers’ savings from not paying a commission.
The SEC also claims that since its inception, Robinhood has made misleading statements and omissions on its website under the FAQs page and in customer communications about the payment order for flow bring its primary and largest source of revenue. According to the Cease-and-Desist, Robinhood omitted payment for order flow from its communications because of its potential to be viewed as controversial for customers. Robinhood’s customer service representatives were also directed to omit payment order for flow when responding to direct questions about its sources of revenue.
In October 2018, when media outlets began questioning if Robinhood’s payment for order flow rates negatively affected their customer’s order execution prices, Robinhood claimed on its FAQs webpage that its execution quality “matched or beat that of its competitors.” Robinhood followed-up this claim with an extensive internal analysis that found its execution quality and price improvement metrics were substantially worse than other broker-dealers. Even though Robinhood’s senior personnel were aware of the results of this internal review, this claim remained on Robinhood’s website until June 2019.
Finally, the SEC asserts that Robinhood failed to maintain required records of its modifications to its website FAQ pages and the approval of its modifications as they related to order routing practices and receipt of payment for order flow.
Based on the foregoing, Robinhood violated Section 17(a)(2) and Section 17(a)(3) of the Securities Act, and Section 17(a) of the Exchange Act. Robinhood submitted an Offer of Settlement in anticipation of the Cease-and-Desist Order. The SEC orders that Robinhood pay a $65 million civil money penalty to the SEC and cease-and-desist from committing or causing any violations and any future violations of the Securities Act and Exchange Act.
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