As the Securities and Exchange Commission continues to wield its enforcement power against robo-advisors, hitting yet another firm last week with failing to disclose it put its interests over customers, industry and legal pundits are wondering if $102 billion newcomer Robinhood may be up for another SEC drubbing.
The agency already fined Robinhood $65 million in December for deceiving customers about how the stock trading app makes money and failing to deliver the promised best execution of trades. Robinhood agreed to pay the $65 million civil penalty, without admitting or denying SEC’s findings.
But the SEC’s clear signal that it is ramping up enforcement against robo-advisors has some wondering if Robinhood may be in for more enforcement actions after the settlements it extracted from the robo platforms like SoFi Wealth in recent days. Charles Schwab's announcement earlier this month that it was reserving $200 million in anticipation of an SEC settlement regarding its robo advisors reveals that the settlements could be large in dollar amount.
“I would think that Robinhood would very clearly be in the crosshairs of the SEC for similar conduct," Fox contributor and plaintiff's attorney Andrew Stoltmann said.
"Once the SEC figures out a plan of investigation and secures a settlement, they almost always look at similar practices at other firms. It is a little bit of a cut and copy process for the agency. It appears as though Robinhood hasn’t invested significantly in compliance and in its platform in comparison to wire houses and larger discount brokerage firms and I think regulators will find bringing actions against them to be easier than some of the larger firms," added the attorney, founding partner of Stoltmann Law Offices.
Robinhood’s revenue more than doubled in the second quarter to $565 million and revenue surged more than 131% in the period from $244 million a year ago. The company went public on July 29 with a stock price of more than $342. As of August 23, Robinhood shares were trading at $43.79.
“The thing about robo-advising is it seems to work for smaller investors and less well for larger investors. But there is a huge pool of people drawn to it because of its perceived low cost,” said Adam Gana, a New York City-based securities arbitration attorney and professor at New York Law School told Financial Advisor magazine.
“It does seem that we are currently ripe for regulatory action or legislation on robo advisors, but nothing is ever going to happen in the this Congress because of the filibuster rules. You don’t have the support of Republicans,” Gana added.
Robinhood dodged a major hit to its business model after the House Financial Services Committee voted to quietly shelve legislation to ban the practice known as "payment for order flow” in mid-August. Robinhood received $180 million in payments for trades in the second quarter, according to its SEC filing.
While the House panel’s decision was a slight to SEC Chairman Gary Gensler’s investor-first agenda, SEC enforcement on the robo-advisor front has continued unabated.