Robinhood defends its app to regulators

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Robinhood Markets Inc. on Friday told Massachusetts regulators that it doesn't take advantage of inexperienced customers, capping a wild week during which the popular online brokerage drew fierce ire for doing just the opposite: standing in customers' way.

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Still reeling from intense blowback from its decision this week to restrict customers from making trades on certain highflying stocks, Robinhood late Friday responded to a December complaint from Massachusetts securities regulators. The state has accused Robinhood of failing to protect its customers and their assets by aggressively marketing to inexperienced investors and failing to implement controls to protect them.

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In a 50-page response, Robinhood called the allegations false and the complaint "misrepresents the Robinhood experience."

Instead, Robinhood countered, it has helped open the door to investing to millions of people. It dismissed claims that the brokerage encourages frequent interaction with its platform, fails to maintain smooth technological operators and allows customers to engage in riskier options trading without having the necessary qualifications. Even more, Robinhood said, most of the items for which it was criticized by regulators are legal.

"It is legal for customers to elect to receive notifications on their phones, to join wait lists, and to receive free shares of stock. App features like digital confetti are legal," Robinhood said in its response. "It is also legal for those customers to trade options, and for Robinhood to approve customers for options trading based on prior options experience."

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It continued: "And it is legal for Robinhood to have an app that has, on isolated instances, experienced temporary outages. All websites and apps are susceptible to outages, and many brokerage firms experience them."

A spokeswoman for William Galvin, the Secretary of the Commonwealth of Massachusetts, whose office filed the administrative complaint in December, declined to comment on Robinhood's response, saying it is being reviewed. She added that the office is still confident in its complaint "and recent events have not changed that."

In just over a month, much has changed for the online brokerage, where millions of users have flocked in recent years to place free trades. In addition to the accusations from Massachusetts, Robinhood now faces scrutiny from individual investors and members of Congress, who have accused the company of preventing users from capitalizing on a wild week of trading. On Thursday, Robinhood was one of many brokerages that restricted trading in hot stocks including GameStop Corp. and AMC Entertainment Holdings Inc.

Behind the scenes, Robinhood was rapidly putting together a more than $1 billion infusion meant to help the company meet rising demands on its cash stemming from the frenzied trading.

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In Friday's response to the Massachusetts case, the company also disputed claims that it falls far short of the "fiduciary standard" that the state had recently adopted, which requires broker-dealers to act in clients' best interest. The accusations centered on the tactics that the company uses to keep customers engaged, claiming that it "encourages customers to use the platform constantly" through what it calls "gamification."

Robinhood argued the fiduciary rule doesn't apply because, the brokerage contended, it is only relevant when a broker-dealer gives a customer a recommendation or provides investment advice. It added the list it offers of the 100 Most Popular stocks is the same for all customers and aren't targeted to any specific customer or group. It also denied that it "gamifies" the experience for investors and stated that criticizing app features like confetti "reflects a distinctly antiquated view of communication in the digital age."

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Robinhood has long prided itself on "democratizing" the markets — and its moves this week to restrict trading were seen by some as directly undercutting its mission. In its response Friday, Robinhood reiterated that idea to regulators, with the brokerage claiming that in the three years since December 2017, it had saved Massachusetts customers between roughly $180 million to $360 million in commissions.

Robinhood also alleged that securities regulators didn't speak "to a single Robinhood employee during its investigation" or request "key documents" on topics including technological outages and options approval. Because of that, Robinhood claimed, the regulators' complaint was "fundamentally at odds with the facts."

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