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Robinhood (HOOD) Receives SEC Warning for US Cryptocurrency Business
Robinhood Markets, Inc. HOOD has received a warning from the Securities and Exchange Commission (SEC) that its cryptocurrency business, Robinhood Crypto, may be subject to enforcement action. The warning comes following the violation of registrations as securities brokers and transfer agents.
The regulator argued that most tokens are subject to SEC rules. Therefore, the platforms they trade on should be registered with the agency. The regulator relies on a test established in a 1946 Supreme Court case to understand whether an asset falls under securities rules.
HOOD said one potential action by the SEC could be a civil complaint and public prosecution that could end in a fine, a cease-and-desist order and other restrictions on crypto operations.
Dan Gallagher, Robinhood’s chief legal, compliance and corporate affairs officer, said: “After years of good faith attempts to work with the SEC for regulatory clarity, including our notorious ‘go in and register’ attempt, we are disappointed that the agency decided to issue a Wells Alert.”
He further added, “We firmly believe that the assets listed on our platform are not securities, and we look forward to working with the SEC to clarify how weak any case against Robinhood Crypto would be on both the facts and the law.”
Robinhood previously said its cryptocurrency business was under scrutiny by the SEC, revealing that the regulator had issued subpoenas regarding the listing and custody of cryptocurrencies. While the trading platform has stopped offering some tokens in response, it still allows the use of various coins, including Bitcoin, Ether, Litecoin, Aave, and Chainlink, as reported on its website.
In 2023, Robinhood’s cryptocurrency-related transaction fee revenue was 17.2% of total revenue. Given that diversified revenue streams and cryptocurrency revenues are not too significant compared to total revenues, the legal threat may not be substantial for the company.
As part of its industry-wide crackdown, the SEC has previously targeted several companies that allow cryptocurrency trading 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 operated an unregistered exchange allowing the sale of certain crypto tokens that the agency considers investment securities and therefore part of the SEC’s jurisdiction.
Coinbase is currently engaged in a lawsuit with the SEC over these allegations.
In the past, HOOD has faced some controversies and sanctions related to its operations. In August 2023, the company lost its lawsuit against Massachusetts Secretary of State Bill Galvin.
Galvin alleged that Robinhood treated trading like a game and implemented strategies to entice young, inexperienced traders to engage in risky trades through its online platform, thereby violating the state’s fiduciary duty rule and failing to protect its customers’ money . Similarly, in August 2022, HOOD’s crypto division was fined $30 million by the New York Department of Financial Services for violating anti-money laundering and consumer protection regulations.
Over the past six months, HOOD shares have risen 112.6% versus the industry’s rally of 32.7%.
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Currently, HOOD has a Zacks Rank of #1. 2 (Buy). you can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Legal issues faced by other financial companies
According to a Reuters report, Bank of America Corporation BAC is likely to face a lawsuit for failing to honor its promise to refund overdraft fees to customers facing financial hardship during the COVID-19 pandemic.
Last month, U.S. District Judge Yvonne Gonzalez Rogers ruled that customers likely suspected that, even after quietly terminating its customer support program on August 31, 2020, BAC had misinformed customers on its website and on its mobile app promising relief from overdrafts and insufficient funds fees.
Stifel Financial Corp.SF subsidiaries, Stifel Nicolaus & Co. and Stifel Independent Advisors, have agreed to pay $2.3 million in fines and restitution for alleged violations of Financial Industry Regulatory Authority (“FINRA”) rules relating to exchange-traded products non-traditional.
In its order, FINRA said the firms failed to establish, maintain and enforce supervisory systems, including written supervisory procedures, reasonably designed to achieve compliance with their suitability obligations.
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