An internet-based broker-dealer that provides retail customers with commission-free trading through its website and mobile applications settled FINRA charges for significant systemic failures that led to (i) customers receiving false or misleading information, (ii) system-wide outages and (iii) customers being inappropriately approved to trade options.

In a Letter of Acceptance, Waiver and Consent ("AWC"), FINRA made the following determinations:

  • In violation of FINRA Rules 2010("Standards of Commercial Honor and Principles of Trade"), 2210 ("Communications with the Public"), 2220 ("Options Communications") and 3110 ("Supervision"), the broker-dealer distributed false and misleading information to customers, including:
    • telling certain customers that they needed to upgrade their accounts in order to trade on margin, when such customers were actually allowed to place options trades that would have triggered the use of margin;
    • telling certain customers they were able to "disable" margin in their accounts, when it enabled them to place options trades that would have triggered the use of margin even after they had elected to "disable" margin;
    • displaying cash balances that were inaccurate to certain customers, with some inaccuracies showing accounts' negative cash balances to be twice as large as they actually were;
  • falsely telling customers that they could not lose more than a premium paid to enter a debit spread, when many customers lost significantly more than the premiums they paid; and
  • issuing erroneous margin calls and margin call warnings to certain customers.
  • In violation of FINRA Rules 2010, 2360("Options") and 3110, the broker-dealer relied on computer algorithms with minimal oversight that suffered from significant flaws, including:
    • programming that approved options trading on the basis of inconsistent or illogical information;
    • programming that allowed certain customers with low risk tolerance to be approved to options trading, despite the firm's written procedures prohibiting such customers from being approved for options trading; and
    • programming that only accounted for the most recently provided customer information, allowing customers that were rejected for options trading to be approved mere minutes after their rejection.
  • In violation of FINRA Rules 2010 and 3110, the broker-dealer outsourced the maintenance and operation of its technology, on which its core functions rely, to its parent company, which is not a FINRA member, resulting in:
    • a series of outages and significant system failures that prevented it from providing basic broker-dealer services to its customers; and
    • the outages persisting even after the broker-dealer received two warnings from FINRA that it was not adequately supervising its technology.
  • In violation of FINRA Rules 2010 and 4370("Business Continuity Plans and Emergency Contact Information"), the broker-dealer's business continuity plan (i) only covered events that physically inhibited employees from working and (ii) included references to backup methods for the acceptance and execution of customer orders that the firm did not actually have.
  • In violation of FINRA Rules 2010 and 4530(d), the broker-dealer failed to report tens of thousands of complaints from customers to FINRA, including complaints that concerned (i) false or misleading information furnished by the broker-dealer and (ii) losses suffered as a result of the firm's outages and technological failures.
  • In violation of FINRA Rules 2010 and 3310("Anti-Money Laundering Compliance Program"), the broker-dealer relied on a largely automated customer identification system that was not commensurate to the size of its business and customer base, resulting in the broker-dealer's system (i) overriding alerts to potentially fraudulent customer account applications and (ii) approving such applications without manual review.
  • In violation of FINRA Rule 2010 and Regulation NMS Rule 603(c)("Display of Information"), the broker-dealer did not display on its website and mobile applications the complete market data information.

To settle the charges, the firm agreed to (i) a censure, (ii) a $57 million fine, (iii) restitution totaling $12,598,445, plus interest, (iv) an undertaking to retain a third-party consultant, as outlined in the AWC, and (v) submit to FINRA's Senior Counsel a signed, written certification that the firm has stopped making the false or misleading statements discussed in the AWC. FINRA stated that this action represents the largest financial penalty ever ordered, and emphasized that the penalty amount reflects "the scope and seriousness of the violations."

Primary Sources

  1. FINRA Press Release: FINRA Orders Record Financial Penalties against Robinhood Financial LLC
  2. FINRA AWC: Robinhood Financial LLC

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.