Investment platform Robinhood Financial was charged by Massachusetts securities regulators Wednesday for luring inexperienced investors to open accounts and make trades, and not doing enough to protect them from outages and disruptions on its platform.
The Massachusetts Securities Division of the Secretary of the Commonwealth’s office accused Robinhood of aggressively marketing its trading platform to naive investors and gamifying its app “to encourage and entice continuous and repetitive use of its trading application.”
Robinhood did not respond to an email requesting a comment Wednesday night.
As of May, Robinhood had about 13 million customer accounts. The median age of clients on the app is 31 years old.
“Confetti rains down on the screen of the app after each trade and customers are encouraged to interact with the app repeatedly to move up a waitlist for early access to new products,” regulators said in a statement. They are seeking an unspecified fine and ordering Robinhood to hire an independent compliance consultant to review its platform and infrastructure, as well as its policies and procedures.
“Treating this like a game and luring young and inexperienced customers to make more and more trades is not only unethical, but also falls far short of the standards we require in Massachusetts,” Secretary of the Commonwealth William Galvin said in a press release.
The complaint is the first under the new Massachusetts Fiduciary Rule which became enforceable in September and is meant to hold broker-dealers, which are in the business of buying and selling securities, accountable to their customers.
Robinhood, which earns money off each trade, provided customers with limited or no investment experience the ability to make unlimited trades and did not properly screen some customers before allowing them to trade certain, more complicated investment contracts called options, regulators said.
As of Dec. 8, almost 500,000 Robinhood accounts with more than $1.6 billion in assets were held by Massachusetts customers, regulators said, and about 68% of Massachusetts customers were approved to trade options with little to no investment experience. The complaint claims that Robinhood “prioritized its revenue over the best interest of its customers.”
Regulators also accused Robinhood of failing to prevent frequent outages and disruptions on its platform. Through November, there were 70 outages this year alone, regulators said, with the worst on March 2, a day the Dow Jones Industrial Average posted its largest one-day gain ever at the time. That outage spanned two days, during which Robinhood shut down its help center, leaving its customers unable to access their accounts or contact Robinhood representatives about the outage. Even Robinhood admitted its outages were due to insufficient infrastructure, the complaint noted.
This isn’t the first time Robinhood has come under fire for not working in the best interest of its customers. In December 2019, the Financial Industry Regulatory Authority (FINRA) fined the company $1.25 million for not taking reasonable measures to ensure its customers received the best price on their trades. In that settlement, Robinhood neither admitted nor denied the charges.