RIA Compliance Blog
Even before Robinhood Financial LLC entered the spotlight late last month for having halted trading in Game Stop during that company’s unprecedented short squeeze, Robinhood had already been charged with allegedly violating state securities laws in connection with its business practices. In December of last year, the Securities Division of the Massachusetts Secretary of the Commonwealth sued Robinhood, alleging that the company had engaged in aggressive marketing tactics aimed at young, inexperienced customers. The complaint was based in large part on alleged violations of the duty to act in customers’ best interest, as required by regulations adopted in March 2020 imposing upon broker-dealers the same fiduciary duty applicable to investment advisers operating within the Commonwealth.
According to the complaint, Robinhood failed to act in the best interests of its customers and exposed them to unnecessary trading risks. The Company directed its market at young, inexperienced investors. When they opened accounts, the Company encouraged its customers to use the trading platform frequently and approved unqualified clients for options trading. Although not mentioned in the suit, a 20-year old college student from Illinois committed suicide last summer because he mistakenly thought he owed over $700,000 based on options trades he had made using the Robinhood platform. Earlier this week his parents sued Robinhood, making allegations that echoed the Massachusetts regulator’s charges.