Robinhood Settles with Massachusetts, Agrees to Pay $7.5 Million Over ‘Gamification’ Practices

Robinhood Financial LLC has reached a settlement with Massachusetts securities regulators, agreeing to pay $7.5 million and enact major changes to its platform’s ‘gamification’ features. This agreement, announced on Thursday, concludes a three-year legal dispute, including an unsuccessful appeal to Massachusetts’ highest appellate court.

Highlighted in two billboards with green backgrounds and the iconic white feather logo of Robinhood, this settlement marks a critical moment for the online trading company. The agreement to pay $7.5 million is viewed as a resolution to allegations that Robinhood’s game-like features were manipulative towards novice traders.

Secretary of the Commonwealth, William Galvin, whose office orchestrated the payment, describes it as an “administrative fine.” He emphasizes that Robinhood will undergo a comprehensive overhaul of its digital engagement practices. The case against Robinhood, initiated in 2020, accused the company of using enticing gimmicks such as confetti animation and digital scratch tickets, which purportedly exploited inexperienced traders.

The conflict centered around a unique fiduciary rule set by Galvin’s office, which equates broker-dealers with investment advisers in terms of standards. Robinhood contested this rule in a 2021 lawsuit, claiming an overreach of authority by Galvin. However, the Massachusetts Supreme Judicial Court upheld Galvin’s stance in a critical ruling.

On the verge of appealing to the U.S. Supreme Court, Robinhood opted to settle the case. Galvin, expressing satisfaction with the outcome, hopes that the Massachusetts Fiduciary Rule sets a precedent for other states. He views the rule as a protective measure for investors’ interests.

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Following the lawsuit, Robinhood discontinued many of its ‘gamification’ tactics. The settlement prohibits Robinhood from using celebratory images linked to trading frequency, specific push notifications, or any features resembling gambling games, especially for Massachusetts consumers.

As part of the settlement, Robinhood must also implement transparent disclosures and engage an independent compliance consultant to review its digital engagement strategies. The company’s deputy general counsel expressed relief at putting the issue behind, while a spokesperson disputed the ‘gamified’ nature of their app.

The settlement also addresses cybersecurity concerns following a November 2021 data breach impacting approximately 117,000 Massachusetts customers. Robinhood acknowledged these cybersecurity lapses and agreed to an independent review of its policies.

This legal saga began with Galvin’s strict fiduciary rule in March 2020, leading to administrative action against Robinhood and the latter’s subsequent lawsuit. The Massachusetts Uniform Securities Act supported Galvin’s broad powers to protect investors, blurring the lines between broker-dealers and investment advisers and necessitating higher standards for both.

The case, “In the matter of Fidelity Brokerage Services LLC, case number E-2021-0030,” in the Office of the Secretary of the Commonwealth, Securities Division, sets a precedent in the regulation of digital trading platforms.

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