Robinhood is forking over $45 million to the U.S. Securities and Exchange Commission (SEC) after regulators called out the brokerage for a laundry list of compliance failures. This is part of a larger $100 million crackdown aimed at cleaning up Wall Street’s act.
Robinhood’s sins? A 2021 data breach that exposed millions of user emails and names, sloppy record-keeping for its fractional share trades, and a lack of attention to regulations that govern everything from cybersecurity to customer communications.
The SEC didn’t hold back in detailing Robinhood’s failures. Between 2019 and 2023, the company fell short on several federal compliance requirements. For instance, the broker violated Regulation SHO, which exists to curb abusive short-selling practices.
Add that to the list of issues, including their inability to secure customer data and maintain records legally required for their trading operations.
A closer look at Robinhood’s “crimes”
Robinhood’s 2021 data breach was a big one. Hackers exploited weaknesses in its systems, gaining access to names and email addresses of millions of users. The breach was a major hit to the company’s reputation, but that wasn’t the only issue regulators uncovered.
Between April 2019 and July 2022, Robinhood failed to implement solid identity theft protection policies, leaving customers vulnerable to fraud.
From June to November 2021, Robinhood ignored a known vulnerability in its cybersecurity systems. That negligence allowed unauthorized access to sensitive customer information. The SEC also slammed the company for failing to investigate suspicious transactions between January 2020 and March 2022.
These lapses led to delays in filing legally required Suspicious Activity Reports (SARs), a critical part of financial compliance.
The SEC order didn’t stop there. Robinhood was called out for failing to maintain some of its customer communications between 2020 and 2021. This included emails and other correspondence that federal law mandates must be preserved.
According to the SEC’s acting director of enforcement, Sanjay Wadhwa, these failures went beyond compliance. “When firms fall short of those obligations, the consequences go far beyond deficient document productions,” Wadhwa said.
Robinhood didn’t deny the allegations. Instead, the company issued a statement calling the violations “historical.” Lucas Moskowitz, the firm’s general counsel, said, “We are well-positioned to continue leading the industry in developing the innovative products and services our customers want and need.”
Robinhood also made it clear they’re eager to move forward under a new SEC administration, just like the rest of us.
Wall Street firms face steep penalties
Robinhood wasn’t the only target in this regulatory sweep. The SEC also fined 12 other firms for record-keeping violations, collectively raking in $63 million in penalties. The violations? Using unofficial communication channels like messaging apps that sidestepped record-keeping requirements.
Blackstone topped the list of offenders, agreeing to pay $12 million in fines. KKR followed with $11 million, while Charles Schwab shelled out $10 million. Other firms, including Apollo Capital Management, TPG Capital Advisors, and divisions of the Carlyle Group, were hit with $8.5 million penalties each.
Santander US Capital Markets paid $4 million, and PJT Partners got away with the smallest fine: $600,000. In Blackstone’s case, senior managing directors had been using unapproved platforms since at least December 2019.
These platforms allowed them to share sensitive information about client trades and investment strategies outside of legal channels. The SEC’s investigation revealed that this kind of communication violated federal securities laws requiring firms to maintain records of their activities.
The agency’s crackdown is part of a larger effort to enforce strict compliance across the financial industry. Over the past few years, banks alone have paid billions in fines for similar violations, and this latest wave of penalties shows the SEC isn’t letting up anytime soon.
Sanjay Wadhwa echoed this sentiment, emphasizing the importance of compliance for maintaining market integrity. “It is essential to the Commission’s broader efforts to protect investors and promote the integrity and fairness of our markets that broker-dealers satisfy their legal obligations,” Wadhwa said.
But despite the fine, Robinhood’s finances are in decent shape. The company is set to post its fifth consecutive quarter of profitability. In the third quarter of this year, it reported a net income of $150 million, proving that the penalty likely won’t hurt its bottom line too much.
Still, the regulatory scrutiny doesn’t look good for a company that’s already had its fair share of public controversies. Robinhood became a household name during the 2021 GameStop trading frenzy, where it faced backlash for restricting trades during the stock’s meteoric rise. Since then, the company has been trying to rehabilitate its image, but this latest fine is another reminder that it still has a long way to go.
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