SEC Reveals Distribution Plan on $65M Robinhood Penalty

The Enforcement Division of the Securities and Exchange Commission (SEC) has submitted a proposed plan for the distribution of monies paid by Robinhood Financial, LLC to its customers who were harmed by Robinhood’s false and misleading disclosures from July 1, 2016 through June 30, 2019, inclusive.

On December 17, 2020, the SEC issued an Order against Robinhood. The Commission found material misrepresentations and omissions by Robinhood relating to its revenue sources, specifically its receipt of payments from certain principal trading firms, for routing Robinhood customer orders to them.

Robinhood launched its retail brokerage business in 2015, and by mid-2018, it was one of the largest retail broker-dealers in the United States. One of Robinhood’s primary selling points was that it did not charge its customers trading commissions. However, even with the “commission free” commitment, Robinhood’s customers received inferior execution prices compared to what they would have received from Robinhood’s competitors. For larger value orders, this price differential exceeded the amount of commissions that Robinhood’s competitors would have charged. The commission then found these inferior prices were caused, in large part, by the unusually high customer order flow fees Robinhood charged the principal trading firms to which it routed its customer orders. 

Since Robinhood’s launch, payment for order flow has been Robinhood’s single largest source of revenue. But Robinhood omitted to disclose its receipt of payment for order flow in certain of its communications with its retail customers and omitted payment for order flow when it described its revenue sources because it believed that payment for order flow might be viewed as controversial by customers. Robinhood also instructed its customer service representatives not to mention payment for order flow in responding to questions about Robinhood’s sources of revenue.

According to the commission, Robinhood violated its duty of best execution by failing to conduct adequate, regular, and rigorous reviews of the execution quality it provided on customer orders. Robinhood did not begin comparing its execution quality to that of its competitors until October 2018, and did not take appropriate steps during the entire period to assess whether its high payment for order flow rates adversely affected customer execution prices. The Commission ordered Robinhood to pay a $65,000,000.00 civil money penalty as a Fair Fund to be distributed to harmed investors.

The Plan, presented on June 4, 2021, provides for the distribution of the Fair Fund, plus accrued interest and earnings thereon, less the Reserve and Administrative Costs to Eligible Investors. “Eligible Investor” means a person who suffered harm as a result of the Respondent’s conduct described in the Order and who is determined by the Fund Administrator to be eligible for a Distribution Payment from the Fair Fund.

Within 14 calendar days of Commission approval of the Plan, the Fund Administrator will establish and maintain a website devoted solely to the Fair Fund. The Fair Fund’s website will make available a copy of the approved Plan, include a copy of the Plan Notice, and related materials in downloadable form, and such other information that the Fund Administrator believes will be beneficial to Eligible Investors.

The Fund Administrator will use its best efforts to start the distribution within 14 days after the issuance of the Commission’s Order approving the Plan, but no later than September 30, 2021.

All persons who desire to comment on the Plan may submit their comments, in writing, no later than thirty (30) days from the date of this Notice (the date is June 4, 2021 – ED.) to the Office of the Secretary, United States Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090; or by using the Commission’s Internet comment form (http://www.sec.gov/litigation/admin.shtml); or by sending an e-mail to rule-comments@sec.gov.

Comments submitted by email or via the Commission’s website should include “Administrative Proceeding File No. 3-20171” in the subject line.