In a stark revelation, the U.S. Securities and Exchange Commission (SEC) has slapped Robinhood with a hefty $45 million fine for failing to adhere to critical regulatory standards, including those under Regulation SHO. This settlement, announced by the SEC, outlines significant breaches by Robinhood Securities LLC and Robinhood Financial LLC, casting a shadow over the operations of one of the most popular retail trading platforms.
The violations by Robinhood span multiple areas of regulation, notably in maintaining accurate trading data, protecting customer information, and ensuring compliance with anti-market abuse directives. One of the core issues was Robinhood’s failure to comply with Regulation SHO, which governs short selling practices. From May 2019 to December 2023, Robinhood did not meet the requirements for close-out, order-marking, and locate in its handling of fractional shares and stock lending, leading to a misclassification of over 15 million short sale orders as “long” due to systemic errors in calculating net positions.
Another alarming issue was the cybersecurity breach in 2021, where the personal data of millions of users was compromised, highlighting Robinhood’s inadequate safeguards against cyber threats. The SEC pointed out that Robinhood did not sufficiently protect customers from identity theft, nor did they adequately investigate suspicious activities or maintain proper recordkeeping. This breach not only compromised customer trust but also underscored the dire need for robust security systems in financial institutions.
Robinhood Securities also fell short in providing accurate Electronic Blue Sheets (EBS) data to the SEC, a critical tool for regulatory oversight, over a span of five years. This lapse in reporting adds to the list of compliance failures, further tarnishing Robinhood’s regulatory record.
The misclassification of trading orders was rampant; between December 2019 and May 2022, more than 58 million riskless principal short sale orders were incorrectly labeled as “long”. Subsequently, from May 2022 to December 2023, over 4.5 million principal orders were marked as “short exempt” without meeting the necessary criteria, potentially skewing market data and investor decisions.
In response to these findings, Robinhood has made attempts at remediation, including updating coding and enhancing inventory systems, though these measures were slow to rectify the compliance issues, which persisted until June 2023. The settlement splits the penalty between Robinhood Securities ($33.5 million) and Robinhood Financial ($11.5 million), with additional requirements for internal audits and certification of remedial actions to ensure future compliance.
This case serves as a cautionary tale for fintech companies navigating the complex landscape of securities regulation, emphasizing the importance of robust compliance frameworks to safeguard both the market and customer interests.
Source:
https://www.sec.gov/files/litigation/admin/2025/34-102170.pdf?ref=dismal-jellyfish.com
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