Robinhood (HOOD) Gets SEC's Notice for US Crypto Business

Robinhood Markets, Inc. HOOD has received a notice from the Securities and Exchange Commission (SEC) that its crypto business — Robinhood Crypto — could face an enforcement action. The notice comes as a result of the violation of registrations as a securities broker and transfer agent.

The regulator has argued that most tokens are subject to SEC rules. Thus, the platforms where they trade ought to be registered with the agency. The regulator relies on a test laid out in a 1946 Supreme Court case in order to figure out whether an asset falls within the securities rules.

HOOD stated that a potential action from the SEC could be a civil complaint and a public court proceeding that may end up with a fine, a cease-and-desist order and other restrictions on crypto operations.

Dan Gallagher, Robinhood’s chief legal, compliance, and corporate affairs office, said, “After years of good faith attempts to work with the SEC for regulatory clarity, including our well-known attempt to ‘come in and register,’ we are disappointed that the agency has decided to issue a Wells Notice.”

He further added, “We firmly believe that the assets listed on our platform are not securities and we look forward to engaging with the SEC to make clear just how weak any case against Robinhood Crypto would be on both the facts and the law.”

Robinhood earlier stated that its crypto business was under scrutiny by the SEC with a disclosure that the regulator sent subpoenas regarding cryptocurrency listings and custody. Though the trading platform ceased the offerings of some tokens in response, it still enables the use of various coins, including Bitcoin, Ether, Litecoin, Aave and Chainlink, as per its website.

In 2023, Robinhood’s crypto-related transaction fee revenues were 17.2% of total revenues. Given the diversified revenue streams and crypto revenues not being too significant relative to total revenues, the legal threat might not be substantive to the business.

As part of its industry-wide crackdown, the SEC earlier targeted several firms that allow the trading of cryptocurrency by U.S. customers.

In June 2023, the SEC filed a lawsuit against Coinbase Global, Inc. COIN, the largest U.S. cryptocurrency exchange, alleging that COIN was operating an unregistered exchange by allowing the sale of certain crypto tokens the agency considers to be investment securities and hence, part of the SEC’s jurisdiction.

Currently, Coinbase is engaged in a lawsuit with the SEC against these allegations.

In the past, HOOD faced certain litigations and penalties pertaining to its operations. In August 2023, the company lost its case against the Massachusetts Secretary of State, Bill Galvin.

Galvin alleged that Robinhood treated trading as a game and implemented strategies to entice young and inexperienced traders to engage in risky trading through its online platform, thus violating the state’s fiduciary duty rule and failing to protect its customer's money. Similarly, in August 2022, HOOD’s crypto division was fined $30 million by the New York Department of Financial Services for the violation of anti-money laundering and consumer protection regulations.

Over the past six months, shares of HOOD have surged 112.6 % compared with the industry’s rally of 32.7%.

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Currently, HOOD carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Legal Hassles Faced by Other Finance Firms

Per a Reuters report, Bank of America Corporation BAC is likely to face a lawsuit for failing to honor a promise to refund overdraft fees to customers facing financial trouble during the COVID-19 pandemic.

Last month, U.S. District Judge Yvonne Gonzalez Rogers ruled that customers probably suspected that even after quietly ending its Client Assistance Program on Aug 31, 2020, BAC misinformed customers on its website and mobile application by promising relief from overdraft and insufficient fund fees.

Stifel Financial Corp.’s SF subsidiaries, Stifel Nicolaus & Co. and Stifel Independent Advisors, have agreed to pay $2.3 million in fines and restitution over alleged violations of the Financial Industry Regulatory Authority’s (“FINRA”) rules relating to non-traditional exchange-traded products.

In its order, FINRA said that the firms did not establish, maintain and enforce supervisory systems, including written supervisory procedures, reasonably designed to achieve compliance with its suitability obligations.

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