February 18, 2021

Senator Warren to FINRA in Wake of Robinhood Controversy: How Will You Level the Playing Field for Individual Investors?

Text of Letter to FINRA (PDF)

Washington, DC - United States Senator Elizabeth Warren (D-Mass.), a member of the Senate Banking, Housing, and Urban Affairs Committee and the Senate Finance Committee, sent a letter to the Financial Industry Regulatory Authority (FINRA), the self-regulatory organization that licenses and regulates broker-dealers, asking how FINRA will respond to Robinhood's role in recent market volatility, its decision to cut off customers' trading, and the broader concerns about market fairness that these events represent.

Senator Warren called on the organization to conduct a thorough review to determine whether Robinhood's practices were in compliance with existing laws and regulations governing broker-dealers. She also called on FINRA to fulfill its goal of "protect(ing) the investing public against fraud and bad practices" by addressing misaligned incentives in the brokerage industry -- including ties between trading platforms like Robinhood and large financial institutions like Citadel -- forced arbitration requirements used by Robinhood and others by broker-dealers, and any gaps in market laws, regulations, and enforcement.

FINRA and other regulators have fined Robinhood for harmful practices in recent years, and lawmakers previously raised questions about Robinhood's investor protections.

"Given several findings that Robinhood violated rules governing broker-dealers and lacked systems to ensure their compliance with those rules, the public deserves to understand what steps FINRA has taken to ensure future compliance by Robinhood, whether Robinhood improved its systems and compliance in response to the many complaints filed by regulators and lawmakers, and whether continued violations of market rules may have contributed to the company's role in recent market swings," Senator Warren wrote to Robert Cook, FINRA President and Chief Executive Officer, in her 12-page letter.

Senator Warren raised concerns that relationships between trading platforms and large financial institutions like Citadel, largely through payment for order flow arrangements, may be misaligning brokerage industry incentives. Experts say that these arrangements "warp() the incentives of brokers and encourages them to maximize their revenue at the expense of customers," while also giving market makers "informational advantages over individual investors."

"I am concerned that current oversight of broker-dealers does not sufficiently prevent conflicts of interest caused by payment for order flow, particularly with respect to the relationship between broker-dealers and market makers," Senator Warren wrote. "I urge FINRA to review the potential harm that payment for order flow practices may pose to consumers, the adequacy of existing FINRA regulations and guidance, and potential regulatory or legislative solutions to reduce conflicts of interest that weaken brokers' obligations to investors."

Senator Warren also expressed concern with Robinhood's use of forced arbitration clauses, which deny investors the opportunity to pursue their claims of wrongdoing and seek relief in court. She urged FINRA to consider these issues seriously and take immediate action to provide the public with information about arbitration.

Senator Warren also called for FINRA and other market watchdogs to identify where there may be gaps in the current laws, rules, and guidance used to oversee market participants: "Identifying existing regulatory gaps will be critical in reviewing potential regulatory or legislative solutions. In particular, FINRA and other regulators must identify for Congress and the public areas where regulators lack sufficient enforcement personnel, training, or resources."

Senator Warren requested that FINRA provide a response no later than February 22, 2021. Senator Warren also sent a copy of this letter to the Securities and Exchange Commission (SEC), which supervises FINRA, and Robinhood. Senate Banking Committee Chair Sherrod Brown (D-Ohio) has announced that the Senate Banking Committee will be holding hearings on this matter.

Earlier today, Senator Warren released a statement on Robinhood's response to her letter dated February 2, 2021, in which she raised questions about Robinhood's adherence to regulatory requirements and its contractual obligations to its retail investors. 

In another letter she sent today, Senator Warren questioned Citadel, whose affiliate, Citadel Securities, is the market maker involved in Robinhood's payment for order flow, regarding its relationship with Robinhood.