Quick facts
- Amount: $26 million
- Date: 6-Mar-25
- Violations:
- AML & Customer Identification Failures
- Customer Communication & Handling Deficiencies
- Inadequate Oversight of External Communications & Reporting
- Market Integrity Failures
- Operational & Technical Supervision Lapses
- Supervisory System Failures
- Violation Period: March 2014 - September 2023
Fine Overview
The Financial Industry Regulatory Authority (FINRA) has censured and fined Robinhood Financial, LLC (RHF) and Robinhood Securities, LLC (RHS) (collectively, Robinhood) $26 million for widespread and significant systemic failures in their supervisory systems and procedures across multiple business areas.
These failures, occurring from May 2014 through September 2023 for RHF and from at least November 2018 through July 2022 for RHS, led to numerous violations of securities laws and FINRA rules.
Robinhood accepted and consented to FINRA's findings without admitting or denying them. In addition to the fine, Robinhood agreed to pay restitution to affected customers and undertake remedial actions.
Details of the Fine
Inaccurate Customer Communications ("Collaring")
- From July 2016 to October 2021, RHF did not accurately and completely disclose its practice of "collaring" market orders by converting them to limit orders. For example, RHF did not disclose its "repricing" practice where collars were recalculated based on prevailing market prices before routing.
- From May 2014 to December 2021, RHF's supervisory system was not reasonably designed to ensure customers received accurate and fair information about its order handling.
- RHF did this by applying a limit price generally up to 5% away from a reference price (e.g., for a market buy order at $100, the limit price would be $105). This was intended to prevent executions at prices far from what customers saw and to prevent exceeding buying power.
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If a customer placed a market buy for a security at $100, the initial collar might set a $105 limit. If the market price moved to $97 before routing, RHF would reprice the collar based on $97 (e.g., to $101.85 if a 5% collar). If this new limit price was closer to the original $100 reference, RHF would use the repriced collar. However, if the market price increased (e.g., to $103), the second collar would not be applied if it resulted in a limit price further from the initial reference price.
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This repricing practice was not disclosed anywhere. This also made other disclosures inaccurate, such as an October 2017 Help Center article stating collars would be based on the previous closing price, when, due to repricing, a collared price could be based on pre-market trading prices.
- Millions of orders (over 8.7 million between August 2016 and June 2021) failed to execute because the security's price remained outside the collared limit price, especially for after-hours orders, and were subsequently canceled by RHF or the customers. Customers who then re-entered these orders sometimes received executions that were less favorable, costing them a total of at least $3.75 million. Despite thousands of customer inquiries about why their orders didn't execute, RHF did not revise its disclosures to accurately reflect its collaring practices.
Market Abuse Monitoring / Anti-Money Laundering (AML) Program Failures
- Robinhood's trade monitoring tools to identify prearranged (wash) trades effectively excluded low-priced securities, despite these potentially having a heightened risk for manipulation.
- The firm lacked automated tools to identify suspicious transactions like executions of out-of-the-money options contracts at prices away from the market
- Insufficient Investigation Resources:
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By January 2020, with nearly one million trades per day, the firms had only two full-time analysts and one supervisor for trade surveillance alerts.
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They failed for years to implement a case management system for AML reviews (identified as critical in 2019, but not implemented until late 2021), leading to partial or no review of some AML alerts. For instance, by August 2018, a surveillance report for suspicious trading in low-priced securities was temporarily stopped because the file was too large to open.
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At times in 2020, AML staff took approximately six months on average to complete reviews after alerts were escalated.
- Until October 2020, there were inadequate controls to detect if Robinhood accounts were linked to third-party bank accounts or to monitor these as third-party transfers. Over 19,000 instances occurred where accounts were linked to third-party bank accounts, with over $300 million transferred.
Customer Identification Program (CIP) Deficiencies
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Following a prior AWC related to CIP failures, RHF, between November 2018 and August 2020, approved approximately 14 million new accounts using an unreasonably designed automated CIP that sometimes approved accounts despite red flags of identity fraud. A subsequent lookback identified approximately two million accounts requiring further review, with over 100,000 accounts closed due to inability to verify customer identities.
Inaccurate Data Reporting
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From at least November 2018 through April 2024, RHS submitted over 17,200 inaccurate or incomplete blue sheets to FINRA, impacting over 216.4 million transactions.
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RHS failed to report or inaccurately reported hundreds of millions of fractional share transactions to trade reporting facilities (TRFs) and the Consolidated Audit Trail (CAT) Central Repository. For example, from December 2019 to February 2021, RHS failed to tape report over 128 million principal fractional share trades to the FN TRF.
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From July 2019, RHF incorrectly calculated customers' average daily options order volume by dividing total monthly order volume by calendar days instead of trading days. This undercounted customers meeting "Professional Customer" criteria, who should have their orders marked with a Professional Customer origin code. RHF didn't identify any Professional Customers until April 2020 due to this error.
BREAKDOWN of the Fine
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A censure.
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A joint and several fine of $26 million payable to FINRA.
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Restitution from RHF to affected customers totaling $3,751,578.12 plus interest (related to the collaring practice).
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Restitution from RHS to affected customers totaling $5,807.00 plus interest (related to execution of trades during halts).
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An undertaking requiring senior management to certify remediation of the identified issues and implementation of reasonably designed supervisory systems within 180 days.
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An undertaking by RHS to pay regulatory transaction fees for unreported fractional share trades.
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An undertaking by RHS to resubmit corrected versions of erroneous or incomplete blue sheets.
Select Quotes
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"From May 2014 through September 2023, RHF, and from at least November 2018 through July 2022, RHS, failed to establish and maintain supervisory systems that were reasonably designed for the firms brokerage businesses, resulting in numerous violations of securities laws and FINRA rules."
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"From January 2017 through November 2021, RHF, and from November 2018 to November 2021, RHS failed to establish and implement reasonable anti-money laundering (AML) programs, which caused the firms to fail to detect, investigate, or report a wide variety of suspicious activity, including manipulative trading, suspicious money movements, and instances where customers' accounts were taken over by third-party hackers."
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"From at least November 2018 through July 2022, RHS failed to reasonably supervise its reporting of accurate and complete trade, order, and position data to FINRA, FINRA trade reporting facilities, the Consolidated Audit Trail (CAT) Central Repository, and the Options Clearing Corporation. These failures impacted tens of thousands of blue sheets... and other reported data concerning hundreds of millions of trades, orders, or positions..."
Sources
