Massachusetts Regulators File Complaint Against Robinhood

The Wall Street Journal first reported early Wednesday the state’s intention to file the grievance.

A Robinhood spokeswoman mentioned earlier than the grievance was filed that the corporate has and can proceed to work intently with all regulators.

“Robinhood has opened up financial markets for a new generation of people who were previously excluded,” she mentioned. “We are committed to operating with integrity, transparency, and in compliance with all applicable laws and regulations.”

The grievance from the workplace of

William Galvin,

the Secretary of the Commonwealth of Massachusetts, marks the newest spherical of scrutiny that the favored brokerage has confronted in its quick historical past. Since it was based lower than a decade in the past, Robinhood has exploded in reputation, amassing greater than 13 million buyer accounts. Traders are usually drawn to the user-friendly platform that permits clients to commerce securities like shares free of charge.

But its explosive development in recent times has additionally made it the target of probes from regulators. Last 12 months, Robinhood agreed to pay $1.25 million to settle claims from the Financial Industry Regulatory Authority, which alleged the corporate didn’t take steps to make sure it was getting the very best costs for buyer orders. The firm agreed to settle with out admitting or denying fault.

The accusations from Massachusetts heart on the techniques that the corporate makes use of to maintain clients engaged, claiming that it “encourages customers to use the platform constantly” via what it calls “gamification.” The grievance alleges that, via the promise of free shares, push notifications and its signature digital confetti, Robinhood encourages “continuous and repeated engagement with its application.” State regulators allege Robinhood allowed one buyer with no funding expertise to make greater than 12,700 trades in simply over six months.

In one other instance, the regulators level to Robinhood’s rollout of a brand new cash-management characteristic, accompanied by a wait record for patrons to join early entry. Customers got the flexibility to enhance their place on the wait record by “tapping” a pretend bank card within the app as much as 1,000 occasions a day, the grievance says.

It additionally alleges Robinhood violated its personal guidelines concerning choices buying and selling by approving clients to interact within the apply with out having the mandatory {qualifications}. Options permit merchants to pay a comparatively small sum for an enormous return if their wagers show right. In flip, nevertheless, losses can add up if merchants’ bets are mistaken.

Like many brokerages, Robinhood makes cash by a apply referred to as cost for order circulate, sending buyer orders to buying and selling corporations in return for money funds. By encouraging inexperienced traders to repeatedly execute trades, “Robinhood prioritized its revenue over the best interest of its customers,” the grievance says.

It additionally addresses the latest outages Robinhood skilled that sidelined merchants from accessing their accounts at totally different factors this 12 months. “Robinhood failed to adequately protect its customers and their assets” by “failing to implement policies and procedures reasonably designed to prevent and respond to outages,” the state mentioned.

A Robinhood spokesman has mentioned beforehand the platform has labored “diligently to harden our infrastructure, improve reliability, and increase capacity” and is continuous to speculate to verify its methods assist clients on busy buying and selling days. The firm has additionally beforehand mentioned it’s persevering with to extend instructional instruments for patrons.

In an interview, Mr. Galvin mentioned his workplace filed the grievance to guard younger Massachusetts traders. The platform, he mentioned, “is not presented as serious investing with substantial risk.”

“It’s presented as some sort of game that you might be able to win,” he added. The grievance estimates that as of early December, Robinhood has almost 500,000 clients in Massachusetts with accounts totaling over $1.6 billion.

Massachusetts regulators, underneath Mr. Galvin, are recognized for taking a tough line in opposition to monetary corporations, beforehand bringing probes in opposition to Charles Schwab Corp. and Fidelity Investments, amongst others.

But the grievance in opposition to Robinhood focuses, partly, on what the regulator says is the corporate’s violation of the state’s new fiduciary rule, which it started imposing in September. The grievance marks Mr. Galvin’s first enforcement motion of the rule.

The regulation stipulates {that a} broker-dealer has an obligation of loyalty to its clients, partly by making suggestions that give precedence to the purchasers’ pursuits with out regard to the pursuits of every other occasion. Regulators say the lists of fashionable trades to which customers have entry have the potential to affect the securities that merchants purchase, with out the corporate conducting “a suitability analysis” of these investments.

“This is no different from a broker-dealer agent handing a list of securities to a customer, pretending to be surprised when the customer purchases securities from that list, and then proclaiming that he made no recommendations to the customer,” the grievance says.

Among different requested reduction, Massachusetts regulators search to require Robinhood to interact consultants to assessment its infrastructure in response to the platform outages and to boost its insurance policies for approving customers for choices buying and selling. The grievance additionally suggests an administrative advantageous be positioned on Robinhood.

Write to Caitlin McCabe at caitlin.mccabe@wsj.com