Robinhood has been fined $65 million by the US Securities and Exchange Commission (SEC) for “misleading customers about revenue sources.”
Multiple misleading statements and omissions about its largest revenue source were made by the US-based FinTech business between 2015 and late 2018.
The SEC order found that one of Robinhood’s selling points to customers was that trading was “commission free,” but this was due in large part to its unusually high payment for order flow rates.
The Commission said that Robinhood customers’ orders were executed at prices that were inferior to other brokers’ prices.
According to SEC, Robinhood falsely claimed in a website FAQ between October 2018 and June 2019 that its execution quality matched or beat that of its competitors.
The Commission’s order found that inferior trade prices in aggregate deprived customers of $34.1 million even after taking into account the savings from not paying a commission.
“Robinhood provided misleading information to customers about the true costs of choosing to trade with the firm,” said Stephanie Avakian, director of the SEC’s enforcement division. “Brokerage firms cannot mislead customers about order execution quality.”
Joseph Sansone, chief of the SEC Enforcement Division’s Market Abuse Unit, added: “Robinhood failed to seek to obtain the best reasonably available terms when executing customers’ orders, causing customers to lose tens of millions of dollars.
“Today’s action sends a clear message that the Commission will not allow brokers to ignore their obligations to customers.”
Dan Gallagher, chief legal officer at Robinhood, said: “The settlement relates to historical practices that do not reflect Robinhood today.
He added: "We recognise the responsibility that comes with having helped millions of investors make their first investments, and we’re committed to continuing to evolve Robinhood as we grow to meet our customers’ needs.”
A Robinhood spokesperson said that the company is fully transparent in its communications with customers about its current revenue streams, stating that the firm has "significantly improved our best execution processes, and have established relationships with additional market makers to improve execution quality."
Robinhood has agreed to retain an independent consultant to review its policies and procedures relating to customer communications, payment for order flow, and best execution of customer orders.
Earlier this year Robinhood raised $200 million as part of a Series G round at a valuation of $11.2 billion, with the latest raise taking that to $11.7 billion.
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