Robinhood Markets Inc. will pay $45 million in penalties after the U.S. Securities and Exchange Commission (SEC) alleged that two of its broker-dealers violated over 10 provisions of the securities laws.
The violations related to Robinhood Securities LLC and Robinhood Financial LLC included lapses in regulatory compliance, cybersecurity protections, and record-keeping.
Core Accusations
The SEC then set out a catalog of Robinhood’s violations, emphasizing significant failures to meet important regulatory requirements:
Underreporting of Red Flags: They did not adequately report suspicious trades, which may have allowed bad actors to continue their activities.
Cybersecurity controls and identity protection weaknesses: Inadequate measures to prevent unauthorized access to customer identity.
Note-Keeping Failures: Robinhood failed to retain electronic communications and operational databases. The 2020-2021 issues affected critical documentation.
Reportable Trading Data Errors: Inaccurate or incomplete “blue sheet data,” which contains information regarding securities trading, was furnished to regulators by Robinhood Securities for more than five years. The errors involved 392 million transactions, according to the SEC order.
Violation of Regulation SHO: Regulation SHO was erected to discourage abusive practices—some short sellers have been accused of releasing false information about a stock to drive down its price or short selling a stock without ensuring the shares are owned before they are sold, a practice known as a naked short.
Robinhood’s stock lending and fractional share trading programs were non-compliant with Regulation SHO between May 2019 and December 2023.
Keeping Up Integrity of the Market
Sanjay Wadhwa, the Acting Director of the SEC’s Division of Enforcement, stated: “Broker-dealers must comply with their legal obligations when performing their various functions in our markets, as doing so is critical to the Commission’s broader efforts to protect investors and ensure the integrity and fairness of our markets.
He added, “Today’s order finds that two Robinhood firms violated a wide range of crucial regulatory obligations, including failing to accurately report trading activity, abide by rules on short sales, file timely suspicious activity reports, maintain books and records, and protect customer information.”
Robinhood’s Response
Robinhood’s general counsel, Lucas Moskowitz, said in a statement about the settlement: “We are pleased to resolve these matters. Most of these are historical matters, which our broker-dealers have already resolved,” the SEC’s order notes.
Moskowitz described the company as well-positioned for the future, saying, “We continue to lead in the development of the products and services customers want and need to facilitate participation in U.S. and global financial markets. We look forward to collaborating with the SEC under new leadership.”
Struggles and Checks Without Strain
The $45 million settlement for Robinhood is also part of its troubled past with regulators. In December 2020, the firm settled for $65 million for misleading customers about the sources of its revenue and about executing trades for its customers at the best prices available in the market.
Additional scrutiny came in August 2022, when its cryptocurrency division was hit with a $30 million fine by the New York State Department of Financial Services for deficiencies in its anti-money laundering and cybersecurity procedures.
A Cautionary Tale for Broker-Dealers
The SEC’s move is a sober reminder that broker-dealers must maintain rigorous compliance standards. To safeguard the interests of investors, regulatory bodies still place a significant emphasis on transparency, security, and accountability.
For Robinhood, this settlement highlights the importance of increased oversight and operational reform to ensure it meets those expectations.
With the sharpening of enforcement with respect to regulatory fins, market participants are encouraged to align their practices to avoid the same kind of sanctions. Robinhood’s punishment illustrates how the cost of not complying, regulatory and reputationally, can be steep in today’s tightly controlled financial markets.
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FAQs
Why was the brokerage firm fined $45 million by the SEC?
The company had been fined for years over failures linked to compliance, including delays in reporting, cybersecurity issues, lapses in record keeping, and breaches that affect the accuracy of securities trading.
What divisions of the firm did the SEC punish?
Under Regulation SHO, the SEC imposed penalties on its securities and financial divisions for violations like inaccurate reporting of data and failing to comply with rules against short-selling.
What is Regulation SHO, and in what way did the company violate it?
Regulation SHO covers short-selling. The firm violated it by not having adequate capabilities in its stock lending and fractional share trading programs from 2019 through 2023.
What was the organization’s response to the SEC settlement?
The agency characterized the settlement as closing a chapter with the firm, which repeated its commitment to compliance and better providing services to customers around the world.
