Robinhood’s $30 Million Settlement: FINRA Flags Major Oversight Failures

According to FINRA's statement on March 7, the agreement includes $26 million in penalties and $3.75 million in compensation to affected users. While the company did not admit to any wrongdoing, it accepted FINRA’s findings and agreed to the settlement terms.

One of the concerns raised by regulators was Robinhood’s failure to monitor its trading operations effectively. Between March 2020 and January 2021, the platform experienced heavy trading activity, which led to delays in its clearing system. Instead of addressing these issues, Robinhood restricted users from buying certain high-volatility stocks, including GameStop (GME) and AMC Entertainment Holdings (AMC).

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Regulators also found serious gaps in Robinhood’s security measures. The company failed to detect and respond to manipulative trading activity, unauthorized account takeovers, and suspicious money transfers. In addition, thousands of new accounts were opened without proper identity verification, violating Anti-Money Laundering (AML) regulations. FINRA stated that Robinhood did not have adequate systems in place to identify or report fraudulent activity.

Another issue involved Robinhood’s handling of trade orders. The company converted market orders into limit orders without fully explaining the impact to users. This practice, known as "collaring", may have resulted in less favorable trade execution for customers.

Robinhood was also criticized for mismanaging customer communications. The company promoted social media posts from paid influencers, some of which contained misleading claims. According to FINRA, these posts lacked balance and fairness, potentially giving investors a false sense of security about trading on the platform.

DraftKings, a sports betting and daily fantasy sports (DFS) company, recently agreed to a $10 million settlement. What was the company involved in? Read the full story.