Robinhood Focusing On Compliance In Wake Of SEC Settlement

Robinhood CEO Vlad Tenev told CNBC on Monday (Dec. 21) that his company is focusing on compliance in the wake of a settlement with the U.S. Securities and Exchange Commission (SEC) over allegations that it misled investors.

The SEC filed charges on Thursday (Dec. 17) that Robinhood deceived customers about how it makes money and failed to deliver the promised best execution of trades. Robinhood did not admit or deny the SEC findings. Robinhood agreed to pay $65 million to settle the claims.

The company offers a brokerage app that is often favored by inexperienced investors. CNBC reported that the Silicon Valley startup has raised than $1 billion in funding this year.

“Between 2015 and late 2018, Robinhood made misleading statements and omissions in customer communications (regarding) its largest revenue source when describing how it made money — namely, payments from trading firms in exchange for Robinhood sending its customer orders to those firms for execution, also known as ‘payment for order flow,’” an SEC statement read.

“One of Robinhood’s selling points to customers was that trading was ‘commission free,’ but due in large part to its unusually high payment for order flow rates, Robinhood customers’ orders were executed at prices that were inferior to other brokers’ prices,” the statement added.

On Wednesday (Dec. 16), Massachusetts securities regulators filed a complaint against Robinhood alleging the company aggressively marketed to inexperienced investors and failed to implement controls to protect them, violating state laws and regulations.

The Massachusetts complaint argues that the company aggressively marketed its business to newbie investors and exposed them to “unnecessary risks,” reported The Wall Street Journal, which reviewed an administrative complaint drawn up by the Massachusetts Securities Division. The complaint alleges that Robinhood fell “far short of the fiduciary standard” adopted this year that requires broker-dealers to act in their clients’ best interests.

Last May, Robinhood hired former SEC Commissioner Dan Gallaher as its chief legal officer. The company, which is privately held, has also hired two new compliance officers.

“The SEC settlement relates to historical practices that don’t reflect Robinhood today,” Tenev told CNBC’s Jim Cramer on Monday. “We want to have not just the best product and technology team, but the best compliance and legal and regulatory teams as well.”

CNBC said an SEC filing showed the company took in $180 million in trading payments during the second quarter.

Tenev co-founded Robinhood with Baiju Bhatt in 2013. Bhatt stepped down as co-CEO last month amid speculation that the company was mulling an IPO.

In September, Robinhood raised $660 million in a Series G extension funding round, bringing its valuation to around $11.7 billion, according to Reuters.