Explained | The regulatory and legal headwinds facing Robinhood

Regulators have issued subpoenas or sought testimony and information from the company and CEO Vladimir Tenev as part of investigations into trading restrictions the brokerage imposed during the meme-stock volatility a year ago.

Updated - January 29, 2022 11:10 am IST

Published - January 29, 2022 11:04 am IST

Robinhood logo.

Robinhood logo.

Robinhood Markets is still facing a number of legal and regulatory threats a year after the retail "meme stock" trading frenzy led the brokerage to restrict trading in some stocks, infuriating customers.

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That episode sparked multiple government probes, a flurry of private lawsuits by aggrieved customers and investors, and intensified regulatory scrutiny of Robinhood's business model, all of which weighed on the company's share price.

"Robinhood operates in an industry that is highly regulated and subject to robust oversight," Dan Gallagher, Robinhood's chief legal and corporate affairs officer, said in a statement.

"We have built industry-leading legal and compliance teams to help ensure that Robinhood remains the platform of choice for millions of investors," he added.

The company has also claimed some recent victories in court. Here are the latest developments:

‘Meme stock’ probes, lawsuits

Regulators have issued subpoenas or sought testimony and information from the company and CEO Vladimir Tenev as part of investigations into trading restrictions the brokerage imposed during the meme-stock volatility a year ago, Robinhood disclosed in July and again in an updated October filing.

The regulators included the U.S. Attorney's Office for the Northern District of California, the U.S. Justice Department, the U.S. Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), the New York Attorney General's Office, other state attorneys general, Congress and some state securities regulators, Robinhood said at the time.

Robinhood is also facing private lawsuits related to the meme stock volatility and its core business practices, such as payment-for-order flow (PFOF), whereby retail brokers route orders to wholesale market makers in return for payment.

The company has seen some success on that front. A federal judge on Thursday dismissed investors' claims of negligence and breach of fiduciary duty.

The same Miami judge previously dismissed another lawsuit accusing Robinhood and other brokerages of colluding with market maker Citadel Securities to prevent "meme stocks" from rising, allegations the companies deny. The plaintiffs have refiled the lawsuit.

Another suit alleging Robinhood violated securities law amid the meme stock fracas is pending.

Other investigations, legal risks

This month a FINRA arbiter said Robinhood owed just under $30,000 in damages to a user who sought compensation for alleged negligence, breach of contract and other issues related to the brokerage's trading restrictions of January 2021. It was the first such successful claim, after others were denied. Jorge Altamirano, the attorney for the Robinhood customer, said his firm has received "an overwhelming outreach" from others and is currently vetting legal claims.

Robinhood is also being probed by New York state's Department of Financial Services over anti-money laundering and cybersecurity issues.

In April 2021, the California Attorney General's Office issued a subpoena seeking documents about Robinhood's trading platform, business and operations, and the application of California's commodities regulations to the platform, the October filing says.

The Massachusetts Securities Division (MSD) also sued Robinhood in December 2020 alleging unethical and dishonest conduct and failure to act in accordance with its fiduciary duty among other lapses. Robinhood has rejected the allegations and is fighting the suit.

Both the SEC and FINRA have requested information from the firm about its now-defunct "For You" feature and "other features displaying lists of securities to customers."

Spokespeople for California's attorney general and FINRA declined to comment. The other agencies did not respond to requests for comment. Robinhood, which has said it is cooperating with the probes, declined to offer fresh details on them.

New regulations

Due to the meme stock saga, the SEC is scrutinising commission-free brokers' business practices, most notably PFOF. Transaction-based revenue accounts for more than 70% of Robinhood's revenue, the company said on Thursday.

SEC Chair Gary Gensler has questioned whether brokers are incentivized to encourage customers to trade more frequently to boost their profits and has floated banning PFOF.

The agency is also examining the use of game-like features to encourage trading and other digital engagement practices.

New regulation in these areas could require "significant changes to our business model," Robinhood has warned.

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