SEC approves distribution plan for $65M Robinhood penalty

The wave of public anger regarding the insultingly low $65 million penalty imposed by the Securities and Exchange Commission (SEC) on Robinhood has failed to dissuade the regulator from proceeding with its distribution plan regarding the penalty.

About a month after the Commission opened a consultation into the distribution plan, the regulator has approved the proposed distribution.

A total of 123 comments were received during the comment period. Additional comments have been received since the comment period ended, which have also been reviewed and considered.

The SEC says:

“None of the comments objected to, or raised any concerns regarding the pool of investors deemed to be eligible to participate in the distribution, the method of allocation used in the Proposed Plan, or the Proposed Plan generally. As such, no modification of the Proposed Plan is necessary”.

Let’s recall some of the public comments about the plan:

“Im sure whatever punishment you decide for Robinhood will be insufficient. Were it decided by a jury of unbiased American people rather than proxies of incest between the banks and the government, the parties responsible might see lifetimes in prison, their wealth repossessed and fairly distributed to the people from whom they stole”.

“If the penalty for a crime is a fine, then that law only exists for the lower class.”

“The fine being assessed to Robinhood for this crime is insultingly low. It’s not even a slap on the wrist”.

The Plan provides for the distribution of the Net Available Fair Fund to Robinhood’s customers who were harmed as a result of Robinhood’s omissions and false and misleading disclosures during the Harm Period described in the Order.

In the Order, the SEC found that 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. In reality, however, “commission free” trading at Robinhood came with a catch: 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. These inferior prices were caused, in large part, by the unusually high fees Robinhood charged the principal trading firms to which it routed its customer orders for the opportunity to obtain Robinhood’s customer order flow. These fees are generally referred to as “payment for order flow.”

Robinhood omitted to disclose its receipt of payment for order flow in certain of its communications with its retail customers. Since Robinhood’s launch, payment for order flow has been Robinhood’s single largest source of revenue. In its customer agreements and trade confirmations, Robinhood stated it “may” receive payment for order flow, and it disclosed certain information about those payments, as required, in its SEC-mandated Rule 606 reports.

However, in FAQs on its website describing how it made money, and in certain communications with customers addressing the same issue, Robinhood 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.

As a broker-dealer that routed its customer orders for execution, Robinhood had a duty to seek to obtain the best reasonably available terms for its customers’ orders, including price. This duty is referred to as the duty of “best execution.” From July 2016 through June 2019, while Robinhood was on notice that its high payment for order flow rates from principal trading firms could result in inferior execution prices for its customers, 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 the Respondent to pay a $65 million civil money penalty.

The SEC created a Fair Fund, pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, so the civil penalty paid can be distributed to harmed investors.

The Fair Fund is comprised of the $65,000,000.00 paid by Robinhood.

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