Financial Industry Regulatory Authority (FINRA) has ordered Robinhood (NASDAQ: HOOD) to pay $29.75 million for multiple regulatory violations, including anti-money laundering (AML) failures and inadequate supervision of its trading systems during critical market events, namely meme-stock frenzy from the COVID-19 era.

Robinhood Hit With $29.75 Million FINRA Penalty for Compliance Failures

The settlement announced last week requires Robinhood Financial to pay $3.75 million in restitution to customers affected by its order "collaring" practices, while both Robinhood Financial and Robinhood Securities will pay a combined $26 million fine for widespread compliance deficiencies.

"Today's action reminds FINRA members that compliance with core regulatory obligations remains critical to safeguarding and serving all investors," said Bill St. Louis, Executive Vice President and Head of Enforcement at FINRA, noting that innovative financial services must still adhere to fundamental regulatory requirements.

It is worth noting that this is the second fine imposed by FINRA on Robinhood in the past four years related to the app's actions in March 2020. During that time, trading outages occurred due to speculation on meme stocks such as GameStop, leaving retail investors unable to trade.

„FINRA had the opportunity to do the right thing and hold Robinhood accountable for all of its negligence that led to the trading restrictions that harmed so many people, but it took the easy way out, only holding Robinhood accountable for its clearing technology failures from that period,” commented on X (former Twitter) August Iorio, the securities arbitration attorney.

Moreover, the penalty and settlement come at a time when another American institution, the U.S. Securities and Exchange Commission (SEC), has closed a year-long investigation into the company's activities, signaling a potentially significant shift in the country's regulatory approach.

Multiple Violations Across AML and Trading Systems

FINRA's investigation uncovered multiple serious violations across Robinhood's operations. The firms failed to establish adequate anti-money laundering programs, missing red flags related to manipulative trading, suspicious money movements, and account takeovers by hackers. Robinhood Financial also opened thousands of accounts without properly verifying customer identities.

During the meme stock trading frenzy of early 2021, Robinhood Securities failed to adequately supervise its clearing technology system despite warning signs of processing delays. The system ultimately experienced severe latency in January 2021 as trading volume surged, hampering the firm's ability to meet regulatory obligations.

"The clearing system experienced severe latency due to a surge in trading volume and volatility, which impacted Robinhood's clearing operations," FINRA stated in its findings.

The regulator also found that Robinhood Financial misled customers about its practice of "collaring" market orders by converting them to limit orders. This resulted in some orders being canceled, forcing customers to resubmit trades that ultimately executed at worse prices. The $3.75 million restitution will compensate these affected customers.

Additionally, the online broker failed to properly supervise paid social media influencers who promoted the platform with statements FINRA deemed "promissory or not fair and balanced, and thus misleading to investors."

Pattern of Regulatory Issues Amid Financial Success

The settlement comes just two months after Robinhood paid $45 million to the SEC for violations of securities laws, including failure to preserve electronic customer communications between 2020 and 2021.

Both Robinhood entities consented to FINRA's findings without admitting or denying the charges and agreed to certify that they have remediated the issues identified in the settlement.

The regulatory action comes despite Robinhood's record financial performance in late 2024, when it reported $916 million in net income on over $1 billion in revenue, with crypto trading becoming an increasingly significant part of its business.

Source: Finance Magnates