Online retail broker Robinhood Financial LLC and its clearing affiliate, Robinhood Securities, have agreed to pay $29.75m in penalties for regulatory violations that include a failure to meet anti-money-laundering(AML) requirements, failing to reasonably supervise and retain social media communications, and inadequate supervision of its clearing technology system.

The sanctions, imposed by FINRA, include a $26m fine and a $3.75m payment to some of its customers.

“In recent years, the brokerage industry has continued to evolve and develop innovative services and technologies that have allowed millions of new investors to access the markets,” Bill St Louis, FINRA’s executive vice-president and head of enforcement, said in a release. “Today’s action reminds FINRA members that compliance with core regulatory obligations remains critical to safeguarding and serving all investors.”

Deeper dive

FINRA found, among other things, the following regulatory issues:

• Disclosures: Robinhood Financial provided customers with inaccurate or incomplete disclosures regarding its practice of “collaring” market orders by converting them to limit orders.
   
• AML and CIP: Robinhood Financial and Robinhood Securities failed to establish and implement a reasonable anti-money-laundering (AML) program, which caused the firms to fail to detect, investigate or report suspicious activity, including manipulative trading, suspicious money movements and instances where customers’ accounts were taken over by third-party hackers. Robinhood Financial also failed to establish a reasonable customer identification (CIP) program, which resulted in the firm opening thousands of accounts when it had not reasonably verified the customer’s identity.
   
• Failure to supervise: Robinhood Securities failed to reasonably supervise its clearing technology system, which was used to clear trades for Robinhood Financial. The firm failed to reasonably respond to several red flags of processing delays due to increased demand on the system which led to the clearing system experiencing severe latency in January 2021 due to a surge in trading volume and volatility, thereby impacting Robinhood Securities’ clearing operations and ability to satisfy certain regulatory obligations.
   
• Recordkeeping issues and misleading comms: Robinhood Financial failed to reasonably supervise and retain social media communications promoting the firm that were posted by paid social media influencers. Some of these communications included statements that were promissory or not fair and balanced, and thus misleading to investors.
   
• Reporting: Robinhood Securities failed to comply with numerous aspects of the firm’s reporting obligations for blue sheets (securities trading information), FINRA trade reporting facilities and the Consolidated Audit Trail.

Prior enforcements

This most recent announcement of penalties follows a settled order with the SEC that Robinhood Securities LLC and Robinhood Financial LLC brokered in January.

In that case, the SEC outlined a number of alleged recordkeeping violations that occurred between 2018 and 2024, including inaccurate or incomplete blue-sheet trading data. The self-regulatory organization also alleged the firms failed to file suspicious transaction reports on time and adequately guard against identity theft and prevent unauthorized access to their systems.

In January 2024, the online brokerage agreed to pay a $7.5m fine and retool its practices to resolve allegations by Massachusetts’ securities regulators that it encouraged everyday investors to place risky trades. Massachusetts Secretary of State Bill Galvin filed the enforcement action in 2020; his office alleged that Robinhood’s app-based service used gamification strategies that treated trading like a video game to lure young and inexperienced customers into placing risky trades.

That Robinhood case in Massachusetts was the first enforcement action under the state’s fiduciary duty rule, implemented in early 2020.

In 2021, Robinhood Financial agreed to pay a $57m FINRA fine and $12.6m in restitution to clients for regulatory violations that occurred between 2014 and 2021.

The alleged violations included distributing false and misleading information to clients, and failing to establish a sufficient CIP. As part of that settlement, Robinhood was required to submit a third-party certification stating that Robinhood had rectified the issues and stopped making misrepresentations.