Robinhood Financial LLC’s settlement with a Wall Street regulator highlights the scrutiny and compliance challenges financial technology companies could face as they transition from startups to publicly traded companies, experts said.
Robinhood agreed to pay nearly $70 million to resolve allegations the brokerage misled customers, approved ineligible traders for risky strategies and didn’t supervise technology that failed and locked millions out of trading, according to the agreement with the Financial Industry Regulatory Authority that became public Wednesday. The settlement is the largest ever levied by Finra.
“These are common issues with fintech companies,” Alma Angotti, a partner at consulting firm Guidehouse who previously worked in the enforcement department at Finra, said. “It is hard to make that shift from technology companies building really cool things to a regulated financial institution.”
She said sometimes the basic tackling of compliance gets lost in the process when companies focus on innovation. “You really need to be cognizant of the compliance requirements that exist in the old world that you’re disrupting, because that will apply to you as well,” she said.
Robinhood, which on Thursday filed paperwork with the Securities and Exchange Commission to go public, is also facing a number of federal and state investigations, including its handling of user account takeovers, its compliance with anti-money-laundering rules and its practices around approving users to trade options, among other things, according to the prospectus.
The company also disclosed in the prospectus that it has reached a settlement in principle with New York’s top financial regulator to resolve allegations that its cryptocurrency trading unit failed to maintain and certify a compliant anti-money-laundering program. The settlement would include a monetary penalty of at least $10 million and would require the company to retain a monitor, according to the filing.
The company has 31 million customers, 18 million of whom had funded accounts as of the end of March, according to the settlement document. The number of customers with funded accounts grew by 143% between the end of 2019 and 2020 and continued to grow this year, according to its prospectus.
“Robinhood has invested heavily in improving platform stability, enhancing our educational resources and building out our customer support and legal and compliance teams,” Jacqueline Ortiz Ramsay, a spokeswoman for the company, said in a statement. “We are glad to put this matter behind us and look forward to continuing to focus on our customers and democratizing finance for all.”
As part of the agreement, Finra asked the fast-growing online brokerage, launched in 2014, to retain an independent consultant to conduct a comprehensive review of its policies, systems, procedures and training to ensure the company’s retail communications comply with the requirements of federal securities laws. The agreement asks the outside consultant to file an initial written report within six months and gives Robinhood another three months to adopt and implement the recommendations from the review.
Robinhood previously retained independent consultants as part of its settlements with the SEC and Finra, a self-regulatory organization of the brokerage industry.
Robinhood also is facing dozens of civil lawsuits from individual investors in relation to trading restrictions imposed by the online brokerage that temporarily limited purchases of certain securities amid a stock-trading frenzy involving so-called meme stocks earlier this year.
The company said an increased focus on new or additional regulations that could impact its business, signaled from recent statements by lawmakers, regulators and other public officials, is a risk factor, according to the prospectus.
Robinhood beefed up its legal and compliance teams over the past year and a half. The online brokerage hired two chief compliance officers and two deputy general counsels in August. These included Norm Ashkenas from Fidelity Institutional & Fidelity Brokerage Technology as the CCO of Robinhood Financial, the company’s securities trading unit; Kelly Zigaitis from Wells Fargo Advisors as the CCO of Robinhood Securities, its affiliated clearing broker; and
who previously worked at the SEC, as the company’s vice president and deputy general counsel. The team also hired a financial crimes leader this year.
Robinhood’s legal team has grown to about 60 people, from 20 to 30 in 2019, according to a company representative. Its compliance team has seen similar growth, according to the company. Robinhood’s compliance functions are now embedded with the brokerage units and supervise new products and technology, a company representative said before the public offering was announced.
Building good compliance and legal functions to keep up with the business is a priority, the company representative said, adding that the Finra settlement demonstrates the results of such measures as the company continues to build up its legal and compliance team.
J. Ashley Ebersole, a partner at law firm Bryan Cave Leighton Paisner LLP who advises fintech companies, said compliance issues are often an effect of the exponential growth a business like Robinhood has experienced. “It comes at a cost,” he said. “But I don’t doubt that they can bear the costs and get it right.”
Write to Mengqi Sun at firstname.lastname@example.org
Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8