Explained | The regulatory and legal headwinds facing Robinhood


Regulators have issued subpoenas or sought testimony and information from the company and CEO Vladimir Tenev as part of investigations into trading restrictions imposed by the brokerage during equity volatility even a year ago .

Robinhood Markets is still facing a number of legal and regulatory threats a year after the retail ‘meme stock’ trading frenzy led the brokerage to restrict certain stocks from trading, infuriating customers.

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The episode sparked several government investigations, a flurry of private lawsuits from aggrieved customers and investors, and intensified regulatory scrutiny of Robinhood’s business model, all of which weighed on the company’s share price.

“Robinhood operates in a highly regulated and closely monitored industry,” Dan Gallagher, Robinhood’s director of legal and corporate affairs, said in a statement.

“We have industry-leading legal and compliance teams in place to ensure Robinhood remains the platform of choice for millions of investors,” he added.

The company has also claimed some recent victories in court. Here are the latest developments:

“Meme stock” investigations, lawsuits

Regulators have issued subpoenas or sought testimony and information from the company and CEO Vladimir Tenev as part of investigations into trading restrictions imposed by the brokerage during equity volatility even a year ago , Robinhood revealed in July and again in an updated filing in October.

Regulators included the United States Attorney’s Office for the Northern District of California, United States Department of Justice, United States Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA) , the New York Attorney General’s Office, other state attorneys general, Congress and some state securities regulators, Robinhood said at the time.

Robinhood is also facing private lawsuits related to meme stock volatility and its core business practices, such as pay-per-order flow (PFOF), through which retail brokers route orders to market makers. wholesale in exchange for payment.

The company has had some success on this front. A federal judge on Thursday dismissed the investors’ claims of negligence and breach of fiduciary duty.

The same Miami judge previously dismissed another lawsuit accusing Robinhood and other brokerages of colluding with market maker Citadel Securities to stop “meme stocks” from rising, allegations that the companies deny. The plaintiffs again filed a complaint.

Another lawsuit alleging Robinhood violated securities law amid the stock market crash is pending.

Other investigations, legal risks

This month, a FINRA arbitrator said Robinhood owed just under $30,000 in damages to a user who sought compensation for alleged negligence, breach of contract and other issues related to the company’s trade restrictions. brokerage January 2021. This was the first such claim, after others were denied. Jorge Altamirano, the Robinhood client’s attorney, said his firm has received “overwhelming outreach” from others and is currently reviewing the legal claims.

Robinhood is also being questioned by the New York State Department of Financial Services on anti-money laundering and cybersecurity issues.

In April 2021, the California Attorney General’s office issued a subpoena requesting documents about Robinhood’s trading platform, business and operations, and the application of California commodity regulations to the platform, says the October file.

The Massachusetts Securities Division (MSD) also sued Robinhood in December 2020, alleging unethical and dishonest conduct and breach of fiduciary duty, among other breaches. Robinhood has dismissed the allegations and is fighting the lawsuit.

Both the SEC and FINRA have requested information from the company about its now-defunct “For You” feature and “other features displaying lists of securities to clients.”

Spokespersons for the California Attorney General and FINRA declined to comment. The other agencies did not respond to requests for comment. Robinhood, which said it is cooperating with the probes, declined to provide further details about them.

New regulations

Due to the same stock saga, the SEC is reviewing the trading practices of commission-free brokers, including the PFOF. Transaction-based revenue accounts for more than 70% of Robinhood’s revenue, the company announced Thursday.

SEC Chairman Gary Gensler questioned whether brokers have an incentive to encourage clients to trade more frequently to increase their profits and launched the PFOF ban.

The agency is also examining the use of game-like features to encourage commerce and other digital engagement practices.

New regulation in these areas could require “significant changes to our business model”, Robinhood warned.


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