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.

The agency hit Schwab with a $200 million penalty in May, allegedly for discrepencies about how its robo-advisor collects revenues internally and how the $7.4 trillion financial services firm’s advertising implied it charges investors no advisory fee.

Robo-advisors, which typically use computer programs to automatically select low-cost exchange-traded funds for investors based on their risk tolerance and automatically rebalance the portfolios, have become increasingly popular across Wall Street, with Goldman Sachs Group Inc. rolling out their platform earlier this year.

On its website, Schwab predicted assets managed by robo-advisors will grow to $460 billion next year, from $47.3 billion in 2015.

Last week the SEC ordered robo-advisor SoFi Wealth to pay a $300,000 fine for failing to disclose conflicts of interest surrounding moving client assets to its own exchange-traded funds.

The SoFi enforcement action stems from a the robo-advisor’s decision in April 2019 to replace the third-party ETFs it had allocated to approximately 20,000 automated portfolio accounts with proprietary ETFs. It used two new ETFs sponsored by the firm’s parent company, Social Finance Inc.

The regulator said SoFi Wealth “violated its fiduciary duty” by failing to disclose to clients on its robo-advisor platform about its own economic interests in the in-house ETFs (SFY and SFYX, respectively).

“SoFi Wealth intended to use client assets managed in the SoFi Invest program to infuse cash into the newly-created, proprietary ETFs to capitalize the ETFs on the second day of trading … making the ETFs more attractive to potential investors,” the SEC said in its order.

SoFi neither admitted nor denied the SEC’s findings, but the SEC did say in imposing the $300,000 civil penalty that it “considered remedial acts promptly undertaken by SoFi Wealth and cooperation afforded the commission staff.”

In December, Robinhood agreed to pay a $65 million civil penalty, without admitting or denying SEC’s findings. A lawyer for the company said the practices “do not reflect Robinhood today.”

The SEC order found that Robinhood provided inferior trade prices that cost customers $34.1 million, even after considering the savings from not paying a commission. 

“Robinhood provided misleading information to customers about the true costs of choosing to trade with the firm,” said Stephanie Avakian, director of the SEC’s Enforcement Division.  “Brokerage firms cannot mislead customers about order execution quality.”

“One of Robinhood’s selling points to customers was that trading was ‘commission free,’ but due in large part to its unusually high payment for order flow rates, Robinhood customers’ orders were executed at prices that were inferior to other brokers’ prices,” the statement added.

The millennial-favored trading app, which is best known for pioneering the “commission-free trading,” like the rest of the online brokerage industry, rely on what’s known as payment for order flow as their profit engine in lieu of commissions.

Taking payments for order flow from Wall Street firms is a controversial, but legal practice done by most electronic brokers. For Robinhood, it’s the biggest revenue source.

The SEC’s Financial Industry Regulatory Authority (Finra) also fined Robinhood $57 million for poor oversight, misleading its clients, and a failure to judge client suitability when it comes to options trading. Finra also instructed the Menlo Park, Calif.-based discount brokerage to pay an estimated $12.6 million to aggrieved clients.