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2 Robinhood broker-dealers to pay $45 million in penalties for securities law violations

On Behalf of | Jan 20, 2025 | Securities and Compliance

The Securities and Exchange Commission announced that broker-dealers Robinhood Securities LLC and Robinhood Financial LLC (collectively, Robinhood) are being penalized for violations of securities laws, AdvisorHub reported.

The SEC said that the two agreed to pay $45 million in combined civil penalties to settle a range of charges arising from their brokerage operations.

“Today’s order finds that two Robinhood firms failed to observe a broad array of significant regulatory requirements, including failing to accurately report trading activity, comply with short sale rules, submit timely suspicious activity reports, maintain books and records, and safeguard customer information,” said Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement.

In a press release, the SEC said the charges against Robinhood arose from the following conduct

-Suspicious Activity Reporting: From January 2020 through March 2022, Robinhood failed to timely investigate suspicious transactions, resulting in systematic failures to timely file suspicious activity reports.

-Identity Theft Protection: From April 2019 to July 2022, Robinhood failed to implement adequate policies and procedures designed to protect their customers from the risk of identity theft.

-Unauthorized Access to Robinhood Systems: From June 2021 through November 2021, Robinhood failed to adequately address known risks posed by a cybersecurity vulnerability related to remote access to their systems. In November 2021, a third party obtained unauthorized access and downloaded information related to millions of individuals who had provided that information to Robinhood.

-Off-Channel Communications: Robinhood had longstanding failures to maintain and preserve electronic communications in violation of the recordkeeping provisions of the federal securities laws. Both firms admitted the findings in the order concerning their off-channel communications failures.

-Retention of Brokerage Data: Robinhood failed to maintain copies of core operational databases in a manner that ensured legally required records were protected from deletion or modification for the required length of time.

-Failure to Maintain Customer Communications: Robinhood failed to maintain some of their communications with their brokerage customers as legally required between 2020 and 2021.

The SEC also said that Robinhood Securities alone committed the following violations:

-Electronic Blue Sheets: For over five years, Robinhood Securities failed to provide complete and accurate securities trading information, known as blue sheet data, to the SEC. Robinhood Securities admitted the SEC’s findings concerning blue sheet filings.

-Fractional Share Trading and Stock Lending: In connection with its stock lending and fractional share trading programs, Robinhood Securities failed to comply with Regulation SHO, the regulatory framework designed to address abusive short selling practices. From May 2019 through December 2023, Robinhood Securities violated Reg SHO’s close-out, order-marking, and locate requirements.

Robinhood Securities was found to have violated Rules 200(g), 203(b)(1), and 204(a) of Reg SHO, while both firms violated Rule 30(a) of Regulation S-P, Rule 201 of Regulation S-ID, and the broker-dealer recordkeeping and reporting provisions of the federal securities laws.

Both firms admitted certain findings in the order and agreed to be censured. They also agreed to conduct an internal audit concerning off-channel communications compliance, and Robinhood Securities agreed to certify its remediation of the deficiencies that caused the Reg SHO violations. Robinhood Securities agreed to pay a $33.5 million penalty and Robinhood Financial agreed to pay a $11.5 million penalty.

Robinhood said it was pleased to resolve the matters.

“As the SEC’s order acknowledges, most of these are historical matters that our broker-dealers have previously addressed,” said Lucas Moskowitz, Robinhood’s general counsel, in a statement. “We are well-positioned to continue leading the industry in developing the innovative products and services our customers want and need to participate in U.S. and global financial markets. We look forward to working with the SEC under a new administration.”

The attorneys at Lewitas Hyman include former senior attorneys at the SEC whose legal experience and industry knowledge make them uniquely qualified to provide counsel on securities regulatory, compliance and enforcement matters. Our attorneys fully understand the regulatory scrutiny financial professionals and their firms face from the various regulators that oversee the financial services industry.  If your firm is facing an investigation from a regulatory agency, please contact Lewitas Hyman at (888) 655-6002 or through our online contact form.