Internet Broker Settles FINRA Charges For Systemic Failures – Finance and Banking


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Internet Broker Settles FINRA Charges For Systemic Failures


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An internet-based broker-dealer that provides retail customers
with commission-free trading through its website and mobile
applications settled FINRA charges for significant
systemic failures that led to (i) customers receiving false or
misleading information, (ii) system-wide outages and (iii)
customers being inappropriately approved to trade options.

In a Letter of Acceptance, Waiver and Consent (“AWC”),
FINRA made the following determinations:

  • In violation of FINRA Rules 2010(“Standards of Commercial Honor and
    Principles of Trade”), 2210 (“Communications with the
    Public”), 2220 (“Options Communications”)
    and 3110 (“Supervision”), the
    broker-dealer distributed false and misleading information to
    customers, including:

    • telling certain customers that they needed to upgrade their
      accounts in order to trade on margin, when such customers were
      actually allowed to place options trades that would have triggered
      the use of margin;

    • telling certain customers they were able to “disable”
      margin in their accounts, when it enabled them to place options
      trades that would have triggered the use of margin even after they
      had elected to “disable” margin;

    • displaying cash balances that were inaccurate to certain
      customers, with some inaccuracies showing accounts’ negative
      cash balances to be twice as large as they actually were;
  • falsely telling customers that they could not lose more than a
    premium paid to enter a debit spread, when many customers lost
    significantly more than the premiums they paid; and

  • issuing erroneous margin calls and margin call warnings to
    certain customers.
  • In violation of FINRA Rules 2010, 2360(“Options”) and 3110, the
    broker-dealer relied on computer algorithms with minimal oversight
    that suffered from significant flaws, including:

    • programming that approved options trading on the basis of
      inconsistent or illogical information;

    • programming that allowed certain customers with low risk
      tolerance to be approved to options trading, despite the firm’s
      written procedures prohibiting such customers from being approved
      for options trading; and

    • programming that only accounted for the most recently provided
      customer information, allowing customers that were rejected for
      options trading to be approved mere minutes after their
      rejection.

  • In violation of FINRA Rules 2010 and 3110, the broker-dealer
    outsourced the maintenance and operation of its technology, on
    which its core functions rely, to its parent company, which is not
    a FINRA member, resulting in:

    • a series of outages and significant system failures that
      prevented it from providing basic broker-dealer services to its
      customers; and

    • the outages persisting even after the broker-dealer received
      two warnings from FINRA that it was not adequately supervising its
      technology.

  • In violation of FINRA Rules 2010 and 4370(“Business Continuity Plans and
    Emergency Contact Information”), the broker-dealer’s
    business continuity plan (i) only covered events that physically
    inhibited employees from working and (ii) included references to
    backup methods for the acceptance and execution of customer orders
    that the firm did not actually have.

  • In violation of FINRA Rules 2010 and 4530(d),
    the broker-dealer failed to report tens of thousands of complaints
    from customers to FINRA, including complaints that concerned (i)
    false or misleading information furnished by the broker-dealer and
    (ii) losses suffered as a result of the firm’s outages and
    technological failures.

  • In violation of FINRA Rules 2010 and 3310(“Anti-Money Laundering Compliance
    Program”), the broker-dealer relied on a largely automated
    customer identification system that was not commensurate to the
    size of its business and customer base, resulting in the
    broker-dealer’s system (i) overriding alerts to potentially
    fraudulent customer account applications and (ii) approving such
    applications without manual review.

  • In violation of FINRA Rule 2010 and Regulation NMS Rule 603(c)(“Display
    of Information”), the broker-dealer did not display on its
    website and mobile applications the complete market data
    information.

To settle the charges, the firm agreed to (i) a censure, (ii) a
$57 million fine, (iii) restitution totaling $12,598,445, plus
interest, (iv) an undertaking to retain a third-party consultant,
as outlined in the AWC, and (v) submit to FINRA’s Senior
Counsel a signed, written certification that the firm has stopped
making the false or misleading statements discussed in the AWC.
FINRA stated that this action represents the largest financial
penalty ever ordered, and emphasized that the penalty amount
reflects “the scope and seriousness of the
violations.”

Primary Sources

  1. FINRA Press Release: FINRA Orders Record Financial
    Penalties against Robinhood Financial LLC

  2. FINRA AWC: Robinhood Financial
    LLC

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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