American financial services company Robinhood Financial has been fined $65 million by the Securities and Exchange Commission for misleading its users. The commission also accused the company of misinforming customers about how it makes its revenue from trades.
The commission said in its order that Robinhood failed to inform and explain to its customers how exactly it makes money. The agency said that between 2015 and 2018 the company only partially explained its business on its online FAQs page and omitted key details such as how it takes cuts from trades.
Robinhood makes most of its money from trades made by its customers through a process known as "payment for order flow." The company made no mention of the process anywhere on its website or mobile app before 2018.
Federal officials said that Robinhood misled customers by marketing its services as being "commission-free." The commission said that the claim is technically not true as Robinhood does give its customers inferior trade prices, which the agency claimed deprived customers of more than $34.1 million. The commission investigators said that customers would have been better off paying commissions and given accurate trade pricing.
"Robinhood provided misleading information to customers about the true costs of choosing to trade with the firm," commission enforcement division director Stephanie Avakian said.
Robinhood's legal officer, Dan Gallagher, said that the company's practices in the past do not reflect its practice. He added that the company is now "fully transparent" and it is actively communicating with customers to inform them about its revenue streams.
The commission's decision comes just a day after the company was sued by regulators in Massachusetts over its aggressive marketing practices. Regulators accused the company of targeting young and inexperienced investors by making its mobile app feel like a video game.
The Massachusetts Securities Division said in its lawsuit that Robinhood intentionally used "gaming strategies to manipulate customers." The agency allegedly that Robinhood turned "serious investing" into a "game," a practice it said was "unethical" and against the state's standards.
Robinhood disagrees with the regulator's claims and said that it intends to fight the state in court.
