The U.S. Securities and Exchange Commission (SEC) today declared that Robinhood, the commission-free trading platform experiencing substantial growth, will pay a $65 million penalty to resolve accusations concerning certain past operational procedures. The issues in question took place between 2015 and 2018, with the SEC asserting that the firm “provided inaccurate statements and failed to disclose key information in communications with customers” regarding the generation of its primary income stream – namely, payment for order flow.

The SEC further stated that the highly valued company “incorrectly represented in a website frequently asked questions section from October 2018 to June 2019 that its trade execution quality was equivalent to or better than that of its competitors,” while in actuality, it was completing customer transactions at “less favorable prices, collectively costing customers $34.1 million, even when factoring in the savings from commission-free trading.”

According to the government agency, Robinhood neither acknowledged nor refuted the SEC’s allegations.

In response to a request for a statement, Dan Gallagher, Robinhood’s Chief Legal Officer, communicated via email that the $65 million settlement “pertains to previous practices that do not represent the current state of Robinhood.” The company also issued a statement, which is unusual for them, indicating that it has “substantially enhanced its best execution procedures and has established connections with additional market makers to enhance execution quality.”

Robinhood’s latest payment for order flow disclosures list five execution venues.

TechCrunch has previously reported on Robinhood’s revenue from payment for order flow in recent financial quarters, as the company has expanded its user base and trading activity, resulting in increased earnings from the execution of customer orders.

For instance, in the second quarter of 2020, Robinhood’s income from payment for order flow approximately doubled to $180 million, compared to roughly $90 million in the first quarter of 2020. It is important to note that these figures are from several years after the periods mentioned in the settlement announcement.

Update: It is important to recognize that this SEC announcement follows closely on the heels of a complaint filed by the Massachusetts Securities Division against Robinhood, alleging that it “participated in actions and practices violating the Act and Regulations by aggressively promoting itself to Massachusetts investors without prioritizing their best interests and failing to maintain the necessary infrastructure and procedures to accommodate its rapidly expanding customer base.”

The state is requesting a reprimand of Robinhood, improvements to its corporate governance, as well as financial restitution and other monetary sanctions. The full Massachusetts complaint is available here.

Update II: Robinhood provided a comment regarding the Massachusetts situation, stating that it “disagrees with the claims made in the complaint by the Massachusetts Securities Division and intends to mount a strong defense.” The company further clarified that it does not provide investment advice, “has worked diligently to ensure its systems can handle increased demand,” and that it has made improvements to its options trading service in recent months.

Impacts

Robinhood experienced a remarkably active year, though not without facing certain challenges. The platform encountered periods of service interruption during critical trading times, prompted changes to its options trading features following a tragic user incident, and observed a deceleration in revenue generated from payment for order flow.

Even with these issues, the company’s performance in 2020 was notably strong. This swift increase in revenue enabled Robinhood to secure substantial funding, amounting to hundreds of millions of dollars, at progressively higher company valuations, positioning it as a potential candidate for an initial public offering in 2021.

It appears unlikely that the current developments will completely halt Robinhood’s expansion, particularly as the allegations pertain to events further removed from the present. Rival companies, such as Public.com which recently secured $65 million in funding, may seek to leverage this situation to their advantage.