Massachusetts regulators file a complaint against Robinhood

The Wall Street Journal first reported the state’s intention to file the complaint on Wednesday.

A Robinhood spokeswoman said before the complaint was filed that the company is working closely with all regulators and will continue to do so.

“Robinhood has opened up financial markets to a new generation of people who were previously excluded,” she said. “We are committed to operating with integrity, transparency and compliance with all applicable laws and regulations.”

The complaint from the office of William Galvin, the Secretary of the Commonwealth of Massachusetts, marks the latest round of investigation that popular real estate has dealt with in its short history. Since its inception less than a decade ago, Robinhood has grown enormously popular and has amassed more than 13 million customer accounts. Traders are typically drawn to the easy-to-use platform that allows clients to trade in securities such as stocks for free.

But the explosive growth of recent years has also made it the target of regulator probes. Last year, Robinhood agreed to pay $ 1.25 million to settle claims from the Financial Industry Regulatory Authority, which claimed the company had not taken steps to ensure it got the best prices on customer orders. The company agreed to settle without admitting or denying guilt.

The Massachusetts allegations are about the tactics the company uses to engage customers and claim it “encourages customers to use the platform constantly” through what it calls “gamification.” The complaint alleges that, through the promise of free stocks, push notifications and signature digital confetti, Robinhood encourages “continuous and repeated engagement in its application.” Government regulators claim that Robinhood allowed a client with no investment experience to make more than 12,700 trades in just over six months.

In another example, regulators point to Robinhood’s introduction of a new cash management feature, accompanied by a waiting list for customers to sign up for early access. Customers were given the opportunity to improve their position on the waiting list by ‘tapping’ a fake credit card into the app up to 1,000 times a day, according to the complaint.

It also alleges that Robinhood has violated its own rules regarding options trading by authorizing clients to practice the practice without having the required qualifications. Options allow traders to pay a relatively small amount for a large return if their bets prove correct. However, the losses in turn can add up if the traders’ bets are wrong.

Like many brokers, Robinhood makes money through a practice called payment for order flow, by sending client orders to trading firms in exchange for cash payments. By encouraging inexperienced investors to transact continuously, Robinhood “prioritized its earnings over the interests of its customers,” the complaint said.

It also addresses the recent glitches Robinhood experienced, which allowed traders to access their accounts at various points this year. Robinhood failed to adequately protect its customers and their assets by “failing to implement policies and procedures that were reasonably designed to prevent and respond to outages,” the state said.

A Robinhood spokesperson has previously said the platform has “worked diligently to strengthen our infrastructure, improve reliability and increase capacity” and continues to invest to ensure its systems support customers on busy trading days. The company has also previously said it will continue to expand educational tools for customers.

In an interview, Mr. Galvin that his office had filed the complaint to protect young investors in Massachusetts. The platform, he said, “is not presented as serious investments with substantial risk.”

“It’s presented as a kind of game that you might be able to win,” he added. The complaint estimates that Robinhood has nearly 500,000 customers in Massachusetts in early December, totaling more than $ 1.6 billion.

The Massachusetts regulatory agencies, led by Mr. Galvin, are known for taking a hard line against financial companies and having previously launched investigations against Charles Schwab Corp., among others. and Fidelity Investments.

But the complaint against Robinhood focuses in part on what the regulator says the company has violated the state’s new fiduciary rule, which it began enforcing in September. The complaint marks the first enforcement of the rule by Mr. Galvin.

The regulation provides that a broker-dealer has a duty of loyalty to its clients, including by making recommendations that give priority to the interests of the clients without taking into account the interests of another party. Regulators say the lists of popular trades that users can access can affect the securities that traders buy without the company conducting an “suitability analysis” of those investments.

“This is no different from a broker-dealer-agent handing over a list of securities to a client, pretending to be surprised when the client buys securities off that list, and then claiming to have made no recommendations to the client,” says the complaint.

Among other things, Massachusetts regulators asked to require Robinhood to hire consultants to overhaul its infrastructure in response to the platform outages and to improve its policies for approving users for options trading. The complaint also suggests that Robinhood will be fined.

Write to Caitlin McCabe at [email protected]