Robinhood, “a premier broker-dealer that gives commission-free transactions to retail purchasers by means of its web site and cellular apps,” lately agreed to pay a document quantity of $ 70 million – consisting of a $ 57 million high quality and over $ 12.5 million in restitution to 2,832 purchasers – to handle a myriad of FINRA rule violations courting again to 2016. Letter of acceptance, waiver and consent n ° 2020066971201 (“AWC”) reads like a remaining examination in a course on company compliance and securities regulation, there are two key takeaways that deserve particular consideration. First, extreme reliance on expertise with out enough warranties or private verification might end in substantial legal responsibility. Second, making claims about new, non-traditional merchandise provided on to prospects could also be deceptive or misleading and in violation of FINRA Guidelines 3110 and 2010, if FINRA determines that communications will not be sufficiently disclosed.
Extreme reliance on expertise
As a FinTech – and really profitable – firm, it is no shock that Robinhood’s operations rely closely on a wide range of totally different applied sciences to ship providers to its purchasers, together with proprietary software program and consumer analytics algorithms. . This reliance on expertise has allowed Robinhood to develop quickly with out having to make the identical costly investments in personnel, actual property, or different prices which have historically accompanied the expansion of different monetary providers firms. Nevertheless, this fast, technology-driven development has not come with out dangers; and as AWC makes clear, many of those dangers have translated into actual issues for Robinhood and its prospects.
First, Robinhood relied on a virtually absolutely automated system to approve purchasers for the choices buying and selling program provided by the corporate. These “choices account approval bots” have been algorithms designed to find out whether or not purchasers had the extent of expertise and danger tolerance required for choices buying and selling to be proper for them. Nevertheless, “approval bots” had apparent flaws and may very well be simply fooled. For instance, a consumer might apply primarily based on sure data and be denied choices buying and selling, then apply a couple of minutes later with totally different and inconsistent data and be authorized for a sure stage of choices buying and selling. To make issues worse, for years Robinhood’s human evaluation of those apps solely lined 20 apps per week. Extra lately, Robinhood has elevated the human evaluation to 500 requests per week, however these critiques are restricted to figuring out whether or not the “approval bots” labored correctly and don’t independently assess whether or not candidates ought to qualify for the. choices buying and selling. Extra usually, Robinhood didn’t have any staff whose predominant skilled obligations have been associated to buyer identification; and through a time period when a single director of the corporate authorized greater than half of the 5.5 million new accounts receivable that have been opened.
Second, Robinhood did not adequately oversee its expertise infrastructure and be sure that it was sufficiently ready for its substantial development, excessive market situations, and potential outages. Robinhood has skilled quite a few outages, one among which was brought on by a single overloaded system that had a domino impact on the remainder of the Robinhood platform. Lower than every week later, Robinhood suffered one other outage when an replace to its programs was applied earlier than it was correctly examined; and the replace prompted the order entry system to close down for about 45 minutes. A significant drawback with Robinhood’s setup was that it was outsourcing the operation of its web site and cellular apps to its guardian firm with out ample oversight. This lack of oversight was notably problematic as a result of Robinhood had written procedures in place that required individuals from Robinhood to supervise these expertise capabilities; however nobody was in the end answerable for their implementation – and nobody ever did.
Third, Robinhood’s programs and its buying and selling software – its key interface to a lot of its purchasers – have been poorly designed in an try to forestall purchasers from buying and selling on margin once they have chosen to not take part in margin buying and selling. or that they solely had another kind of account ought to have prevented them from utilizing margin underneath any circumstances. This technological failure has allowed greater than 818,000 purchasers to commerce utilizing margin when their account kind or particular person alternative ought to have prevented this from occurring. Because the AWC particularly notes, this included the tragic case of a 20-year-old consumer who dedicated suicide after believing he misplaced over $ 700,000 utilizing margin in a commerce regardless of selecting to deactivate the margin on his account. Robinhood lately settled a civil lawsuit filed by the household of the younger man who misplaced his life.
Fourth, Robinhood’s expertise has additionally failed in a number of methods to show correct data to its prospects. In a single occasion, Robinhood displayed inaccurate money balances and “buying energy” calculations for a sure subset of its prospects. In one other occasion, Robinhood displayed incorrect historic efficiency figures to purchasers as a result of they didn’t account for money dividends and different money actions and transactions. In a 3rd instance, Robinhood programs displayed incorrect data to prospects for over 4 years as a result of Robinhood did not well timed course of company transactions similar to inventory splits, dividend funds, and miscellaneous merger and acquisition actions. Robinhood’s incapacity to place in place acceptable programs to observe and confirm the knowledge it communicated to its purchasers in the end impacted tens of millions of its purchasers and was a serious part of FINRA’s rule violations underneath -adjacent to the AWC.
Added to the entire points described above was the truth that Robinhood’s enterprise continuity plan was not adequately designed to cope with expertise emergencies. As an alternative of bearing in mind all forms of contingencies that would influence Robinhood’s operations, the enterprise continuity plan solely meaningfully addressed potential bodily disasters that have been stopping using Robinhood’s places of work. One other basic drawback was that Robinhood primarily based its plan on a mannequin for “small introductory companies”, even though it had develop into a a lot bigger and extra subtle operation than the mannequin plan it envisioned. In 2015, Robinhood had lower than 500,000 prospects. Right now, though it has solely 770 registered representatives and 6 companies, it has 31 million purchasers.
“Fee-free funding”, “Free inventory incentives” and different problematic promotions
Whereas Robinhood’s expertise failures have been important and concerned many alternative features of its operations, FINRA additionally cited Robinhood for numerous deceptive claims it made in reference to promotions, advertising and different communications with purchasers. and potential prospects.
In a naturally fashionable and crowd pleasing promotion, Robinhood sought to draw new prospects by providing free actions to entice new prospects to open accounts. Whereas it was true that Robinhood would give free shares to members of the general public who opened accounts as a part of the promotion, Robinhood did not disclose that there was a 98% likelihood that the free shares would solely have valued at $ 2.50 to $ 10.00. As an alternative, the promotional materials deceptively touted the opportunity of new prospects receiving shares in firms that had a considerably greater worth, like Apple.
In a second episode of selling efforts gone awry, Robinhood was cited for the much-criticized abortive launch of its “Checking & Financial savings” program. Harnessing the facility of viral advertising and its giant present buyer base, Robinhood saturated social media and buyer inboxes with promotional materials for a brand new checks and financial savings product in December 2018. Though the product did have Closed simply in the future after its announcement, the advertising marketing campaign was so profitable that it has resulted in almost 1,000,000 prospects signing up for early entry to the product. Nevertheless, this system’s promotional materials had quite a few crucial flaws, together with: (1) touting SIPC protection for accounts regardless of not having that protection; (2) mistakenly equating the “Checking & Financial savings” mark with a financial institution deposit account; and (3) providing an apparently assured rate of interest of three%, however which was in impact a floating charge that trusted different benchmarks.
Lastly, FINRA took situation with Robinhood’s promoting that it had “commission-free investing” with out additionally adequately disclosing different charges and bills which may apply to the allegedly “commission-free” buying and selling exercise. “. Robinhood additionally erred in promoting its “split-stock investing” capabilities to potential purchasers, because the split-stock funding program had many different phrases and situations that weren’t clearly disclosed as a part of the plan. Promotional materials.
The record-breaking nature of FINRA’s settlement with Robinhood might have made headlines, however the true story as we see it’s twofold.
First, whereas using rising applied sciences, rising connectivity with prospects, and providing new and fascinating monetary merchandise may help firms acquire consideration and acquire market share, there are dangers. substantial to embark on such a technology-dependent path. Because the Robinhood instance clearly reveals, it’s important to mitigate these dangers by guaranteeing that these programs carry out as marketed, are dependable, are correctly monitored and supervised, and that there are contingency measures in place. to cope with potential issues shortly and precisely.
Second, whether or not you supply conventional services to prospects and prospects, or try to supply the most recent and best monetary merchandise, your details about your choices needs to be full, clear, and provides a whole image of all related dangers. Whether or not giant or small, established or rising, each monetary providers agency ought to heed Robinhood’s warning, particularly in mild of the brand new customary of care set by Regulation Finest curiosity.