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Explanation: The regulatory and legal headwinds facing Robinhood


WASHINGTON, July 1 (Reuters) – Robinhood Markets Inc, the online brokerage firm at the center of this year’s retail frenzy, on Thursday revealed previously unreported regulatory risks in its initial public offering both expected.

In an increasingly hostile climate in Democrat-led Washington, Robinhood’s growing regulatory attention could be a drag for some potential investors.

In addition to fines, Robinhood noted that government investigations could lead to trade restrictions, increased compliance checks, product and service changes, and brand damage.

The company, which has 18 million customers, had pulled regulatory penalties for system failures and misleading disclosures before it even sparked an uproar by limiting trading in certain stocks at the height of January’s “same stock” saga. L4N2K9478

This episode sparked several investigations and intensified scrutiny of Robinhood’s business model.

To date, the startup has paid more than $ 136 million to settle allegations of wrongdoing by regulators, including a $ 70 million penalty announced Wednesday by the Financial Industry Regulatory Authority (FINRA). L2N2OC1P1

While those penalties are low by Wall Street standards, Robinhood’s legal fees are rising rapidly from $ 1.4 million in 2019 to $ 105 million last year, according to the documents.

Here are some of the regulatory threats Robinhood identified in connection with its IPO. Read more


Robinhood said regulators issued subpoenas or requested testimony and information from the company and CEO Vladimir Tenev in investigations into trading restrictions imposed by the brokerage during the stock volatility even January.

Regulators included the U.S. Attorney General’s Office for the Northern District of California, the Securities and Exchange Commission (SEC), FINRA, the New York Attorney General’s Office, other state attorneys general, Congress, and some regulatory agencies. state securities regulation.

Perhaps the biggest revelation, however, was that authorities also took the unusual step of seizing Tenev’s cell phone, Robinhood said, without further details.


Robinhood also revealed what appeared to be a previously unreported investigation by the New York Department of Financial Services (DYFS) focused on anti-money laundering and cybersecurity issues the company expects to address for about $ 15 million.

Additionally, in April, the California Attorney General’s Office issued a subpoena seeking documents and information on Robinhood’s trading platform, business and operations, and regulatory enforcement. Californian on commodities to the platform. The company said it is cooperating with the probe.

Unrelated to the memes episode, the Massachusetts Securities Division (MSD) sued Robinhood in December, alleging unethical and dishonest conduct and breach of its fiduciary duty, among other breaches. Robinhood fights the costume.

The NYDFS, New York and California attorneys general, and FINRA declined to comment. The SEC and MSD did not immediately respond to a request for comment.

The company is also the target of more than 50 private lawsuits related to January’s trade restrictions and other issues.


Due to the action saga, policymakers are examining practices central to Robinhood’s business model, including Payment for Order Flow (PFOF), where brokers route retail orders to wholesale brokers in exchange for ‘a payment.

PFOFs and other trade discounts accounted for 75% of Robinhood’s $ 959 million in 2020 revenue, Robinhood said.

SEC Chairman Gary Gensler said the PFOF raised conflict of interest and competition issues, and asked staff to recommend new rules.

The agency is also examining “gamification,” the use of game-like features to encourage trading, as well as other rules relating to liquidity and risk management.

New regulations in these areas could require “significant changes to our business model,” Robinhood warned. Because its competitors are not as dependent on PFOF, increased regulation of the practice “could have a disproportionate impact on our results,” Robinhood said.

Editing by Cynthia Osterman

Our Standards: Thomson Reuters Trust Principles.


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