Regulation

Report: Robinhood May Face $10M+ SEC Fine For Not Disclosing Payments For Order Flow

Robinhood, the brokerage app often favored by inexperienced stock aspirants, is being investigated by the U.S. Securities and Exchange Commission over its alleged failure to disclose practices in which it would sell clients' orders to high-speed trading firms, according to a report by The Wall Street Journal.

If the company chooses to settle the investigation, it could face a steep fine of over $10 million. But that's unlikely to happen soon, as the two sides haven't yet formally negotiated a potential fine, according to unnamed sources that spoke to the WSJ.

In response, Robinhood said it strives "to maintain constructive relationships with our regulators and to cooperate fully with them," the WSJ reported.

The company allegedly sent customers' orders to buy or sell stock options to high-speed trading firms and accepted payments from these firms, according to the WSJ. The practice is called "payment for order flow," and although it's common in executing client trades by retail brokerages, it's also controversial as critics say it creates a conflict of interest for the broker selling the orders. Robinhood reportedly didn't disclose the practice on its website until 2018.

The company has been much-beloved by users, and it has seen a frenzy of activity. But it hasn't been without its various issues.

In March, the company caused disruptions for users after an unexpected outage right as the pandemic was hitting U.S. shores. The site completely shut down for the day, and some users lost money over it. In addition, multiple users reported not having ways to contact the company, with no clear phone number available at the time.

The company offered credits to make up for that issue.

On Monday (Aug. 31), the company suffered yet another setback as it saw delays alongside numerous other online brokerages, including E-Trade, Schwab, Vanguard and TD Ameritrade. Robinhood, which saw thousands of users complaining, said the "display issues" were fixed by midday.

But the amount of regulatory scrutiny on the company — coming after enough complaints were filed about Robinhood by disgruntled users that the regulatory bodies felt like "customer service" for the company — could be a problem for the company. It could jeopardize Robinhood's potential initial public offering.

The company defended itself from the accusations by saying it had worked on the problems since March of this year and was doing better at answering customer service complaints.

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