There is some good news for customers of online trading app Robinhood that were harmed as a result of the company’s conduct from July 1, 2016 through June 30, 2019.
The Division of Enforcement has submitted to the Securities and Exchange Commission (SEC) a proposed plan for the distribution of monies paid in the above-captioned matter. The document proposes a distribution of the civil money penalty paid by Robinhood Financial, LLC to customers who were harmed as a result of Robinhood’s false and misleading disclosures beginning July 1, 2016 through June 30, 2019, inclusive.
Let’s recall that, on December 17, 2020, the SEC issued an Order against Robinhood. The Commission found material misrepresentations and omissions by Robinhood relating to its revenue sources, specifically its receipt of payments from certain principal trading firms, for routing Robinhood customer orders to them.
In the Order the SEC noted that one of Robinhood’s primary selling points was that it did not charge its customers trading commissions. In reality, however, “commission free” trading at Robinhood came with a catch: Robinhood’s customers received inferior execution prices compared to what they would have received from Robinhood’s competitors. For larger value orders, this price differential exceeded the amount of commissions that Robinhood’s competitors would have charged.
These inferior prices were caused, in large part, by the unusually high fees Robinhood charged the principal trading firms to which it routed its customer orders for the opportunity to obtain Robinhood’s customer order flow. These fees are generally referred to as “payment for order flow.”
Robinhood omitted to disclose its receipt of payment for order flow in certain of its communications with its retail customers.
Since Robinhood’s launch, payment for order flow has been Robinhood’s single largest source of revenue. In its customer agreements and trade confirmations, Robinhood stated it “may” receive payment for order flow, and it disclosed certain information about those payments, as required, in its SEC-mandated Rule 606 reports. However, in FAQs on its website describing how it made money, and in certain communications with customers addressing the same issue, Robinhood omitted payment for order flow when it described its revenue sources because it believed that payment for order flow might be viewed as controversial by customers.
Robinhood also instructed its customer service representatives not to mention payment for order flow in responding to questions about Robinhood’s sources of revenue.
As a broker-dealer that routed its customer orders for execution, Robinhood had a duty to seek to obtain the best reasonably available terms for its customers’ orders, including price. This duty is referred to as the duty of “best execution.” From July 2016 through June 2019, while Robinhood was on notice that its high payment for order flow rates from principal trading firms could result in inferior execution prices for its customers, Robinhood violated its duty of best execution by failing to conduct adequate, regular, and rigorous reviews of the execution quality it provided on customer orders.
Robinhood did not begin comparing its execution quality to that of its competitors until October 2018, and did not take appropriate steps during the entire period to assess whether its high payment for order flow rates adversely affected customer execution prices.
As a result of the conduct described in the Order, the Commission ordered Robinhood to pay a civil penalty of $65 million. In the Order, the Commission established a fair fund, pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, so the civil penalty paid can be distributed to harmed investors (the “Fair Fund”).
Robinhood paid the $65,000,000.00 civil penalty pursuant to the Order. The Fair Fund has been deposited in an interest-bearing account at the United States Department of the Treasury’s Bureau of the Fiscal Service (BFS). Other than potential interest income from the BFS investment, the Commission does not anticipate that the Fair Fund will receive additional funds.
The Plan, presented on June 4, 2021, provides for the distribution of the Fair Fund, plus accrued interest and earnings thereon, less the Reserve and Administrative Costs to Eligible Investors.
“Eligible Investor” means a person who suffered harm as a result of the Respondent’s conduct described in the Order and who is determined by the Fund Administrator to be eligible for a Distribution Payment from the Fair Fund.
The Commission staff will determine the Distribution Payment for each Eligible Investor as follows:
- (a) Calculate harm on each customer order as the industry benchmark price improvement less Robinhood’s price improvement, less the industry benchmark commission on such an order, for orders where the difference in price improvement exceeds the industry benchmark commission. For orders where the difference in price improvement is less than or equal to the industry benchmark commission, harm will be zero.
- (b) Calculate reasonable interest on each customer order with non-zero harm using the short-term Applicable Federal Rate, compounded quarterly from the end of the calendar quarter of the Order through August 31, 2021.
- (c) Calculate the Harm Amount for each Eligible Investor as the sum of the harm calculated in (a) above across all of his, her or its orders during the Harm Period.
- (d) Calculate the Interest Amount for each Eligible Investor as the sum of the reasonable interest calculated in (b) above across all of his, her or its orders during the Harm Period.
- (e) Combine each Eligible Investor’s Harm Amount and Interest Amount to determine their Distribution Payment.
Within 14 calendar days of Commission approval of the Plan, the Fund Administrator will establish and maintain a website devoted solely to the Fair Fund. The Fair Fund’s website will make available a copy of the approved Plan, include a copy of the Plan Notice, and related materials in downloadable form, and such other information that the Fund Administrator believes will be beneficial to Eligible Investors.
The Fund Administrator will use its best efforts to start the distribution within 14 days after the issuance of the Commission’s Order approving the Plan, but no later than September 30, 2021.
All persons who desire to comment on the Plan may submit their comments, in writing, no later than thirty (30) days from the date of this Notice (the date is June 4, 2021 – ED.):
- to the Office of the Secretary, United States Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090;
- by using the Commission’s Internet comment form (http://www.sec.gov/litigation/admin.shtml); or
by sending an e-mail to [email protected].
Comments submitted by email or via the Commission’s website should include “Administrative Proceeding File No. 3-20171” in the subject line.