Galvin Takes Aim at Robinhood with Fiduciary Rule

In the first enforcement action of its fiduciary rule, Massachusetts has charged online trading platform Robinhood with, essentially, taking advantage of inexperienced investors.

More specifically, Secretary of the Commonwealth William F. Galvin has charged Robinhood Financial, LLC over the company’s “aggressive tactics” to attract inexperienced investors, its use of gamification strategies to “manipulate” customers, and its failure to prevent frequent outages and disruptions on its trading platform—approximately 70 outages from the beginning of the year, according to the administrative complaint, including one that lasted for nearly two days (March 2-3), when the Dow Jones Industrial Average saw its largest one-day gain to date. 

The complaint filed against Robinhood by Galvin’s Securities Division is the first enforcement action of the Massachusetts Fiduciary Rule announced last year, which Galvin began enforcing in September.

The complaint states that Robinhood employed advertising and marketing techniques meant to target younger, inexperienced investors. “Robinhood, which earns revenue for trades executed by its customers, gave customers with no investment experience the ability to make a potentially unlimited number of trades, without properly screening them to be approved for options trading,” according to the complaint.

Galvin’s office notes that, according to the company, the median age of a Robinhood customer is 31, and approximately 68% of Massachusetts customers approved for options trading on Robinhood report have limited or no investment experience. As of this month, Robinhood had nearly half a million Massachusetts customers whose accounts were valued at more than $1.6 billion.

According to a press release announcing the action, Robinhood uses the promise of free stock to attract new customers and employs gamification strategies to lure customers into consistent participation and engagement, the complaint states. The release comments that “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.”

“As a broker-dealer, Robinhood has a duty to protect its customers and their money,” Galvin said. “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.”

As a result of these aggressive marketing tactics, Robinhood’s customer base has grown exponentially in recent years, but the complaint alleges that the company has failed to keep up with its rapidly expanding customer base. The company’s failure to maintain an adequate infrastructure has resulted in frequent outages and disruptions that have negatively impacted Massachusetts investors.

“Despite its inability to maintain an adequate infrastructure, Robinhood continues to invite more and more customers to open accounts, and once these accounts are open, encourages customers to use the platform constantly,” the complaint states. “Once individuals become customers, Robinhood relentlessly bombards them with a number of strategies designed to encourage and incentivize continued and repeated engagement with its application.”

With the complaint, the Securities Division is seeking an administrative fine and an order requiring Robinhood to engage an independent compliance consultant to review its platform and infrastructure, as well as its policies and procedures.