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Robinhood’s CEO is not licensed by a powerful Wall Street regulator

Noam Galai

Robinhood CEO Vlad Tenev is not licensed by FINRA, Wall Street’s powerful self-regulator, even though he presides over one of the nation’s largest and most powerful online brokers. ​

Tenev has emerged as the public face of Robinhood as the startup has come under fire for its decision​, on one of the market’s most volatile days, to ​suspend buying of GameStop, AMC and other stocks boosted by an army of traders on Reddit.

Last week, Robinhood ​says it was blindsided by surging capital requirements from its clearinghouse. To meet those requirements, the app announced that it had raised $3.4 billion ​within four days to fund its explosive growth. ​

The fact that Tenev is not registered with FINRA, short for the Financial Industry Regulatory Authority, raises further questions among securities industry analysts about Robinhood’s operations and the regulatory oversight of the app.

In a statement to CNN Business, Senator Elizabeth Warren called on regulators to “do their jobs to protect customers,” including by examining how firms like Robinhood work “and whether executives like Vlad Tenev should be licensed and trained on market rules and risks.”

What FINRA registration means

FINRA requires “both firms and individuals” to be registered. Robinhood Financial, the broker-dealer, and Robinhood Securities, the clearing broker, are both registered with FINRA.

Unless granted an exemption, FINRA generally requires that the CEOs of registered broker-dealers be registered with the agency. The goal is to ensure these individuals receive the training and demonstrate the competence required for these critical roles. The hope is that a deep education in the plumbing of markets will avoid accidents.

Being registered with FINRA also allows the public to track any violations of licensed individuals on the agency’s Broker Check tool.

Of course, getting registered with FINRA and studying for the exams can be time-consuming, especially for the CEO of a rapidly growing startup.

The CEO of a parent company that owns a broker-dealer does not necessarily need to be registered. ​

In this case, Tenev is the CEO of Robinhood Markets, the parent company that is not registered with FINRA. Robinhood Markets owns a broker-dealer and a clearing broker.

Robinhood told CNN Business that Tenev does not directly manage the FINRA-registered leaders of the broker-dealer or clearing broker — but declined to say who does. None of Tenev’s direct reports appear to be registered with FINRA. ​

Robinhood did not provide an organizational chart, but referred inquiries to one published in January by The Information, a tech publication.

Who is registered and who isn’t

Some experts were alarmed that Tenev is not registered with FINRA, while others said it may not be a problem because he is the CEO of the parent company, not the broker-dealer.

“If you are engaged in the securities business based upon the scope of the work, you are required to be registered,” Stephen Sax, the former chief compliance officer at FBN Securities, told CNN Business.

Indeed, FINRA’s website says an individual “must be registered” if they are engaged in the securities business of a firm, including not just salespeople and branch managers but partners, officers and directors.

“This is a huge story that he is not registered. On a scale of one to 10, it’s a 10,” said Sax, who worked as an investigator in the 1970s at FINRA’s predecessor, the National Association of Security Dealers, or NASD.

A Robinhood spokesperson said that the leadership of its broker-dealer and clearing broker are appropriately licensed.

David Dusseault is listed as the president and chief operating officer of Robinhood Financial, the broker-dealer, while Norm Ashkenas is the chief compliance officer. Both are registered with FINRA. Robinhood did not disclose who Dusseault reports to.

Bao Nguyen, risk advisory services principal at accounting and advisory services firm Kaufman Rossin, said it’s not uncommon that the CEO of a parent company of a broker-dealer is not registered with FINRA.

‘Gray area’

But at least some of Robinhood’s large rivals do have CEOs with FINRA licenses.

For example, Charles Schwab CEO Walter Bettinger is registered with FINRA and is listed as having his Series 24 as a principal.

Likewise, Anthony Denier, the CEO of Robinhood rival Webull, has his Series 24 license from FINRA.

Square CEO Jack Dorsey is not listed as being registered with FINRA. While Square is known mostly as a payment platform, its booming Cash App lets users invest in bitcoin and individual stocks.

With Robinhood, Charles Whitehead, law professor at Cornell Law School, said “it’s a little more of a gray area” because it depends on just how involved Tenev truly is in terms of supervising operations of the broker-dealer.

“If they are the CEO of a shell company that does nothing more than manage the broker-dealer, that’s an issue,” said Whitehead. “If all you’ve done is rearrange the deck chairs so that you are” supervising a broker-dealer, you should receive a Series 24 license from FINRA given to principals, he said.

Robinhood Markets is principally in the brokerage business, allowing users to invest in stocks, ETFs and crypto​currencies.

Robinhood has a cash management product that lets users earn interest on uninvested cash and spend that money via a debit card. Robinhood Markets also has a podcast and newsletter on the day’s top financial news. ​

Robinhood’s controversial decision

During an interview on Sunday with the platform Clubhouse, Tenev detailed ​his account of Robinhood’s behind-the-scenes negotiations with its clearinghouse, the National Securities Clearing Corporation. Tenev explained that Robinhood received a 3:30 a.m. call requesting the startup put up a staggering $3 billion during last week’s market turmoil.

Tenev said he was asleep at the time of the call and Robinhood’s operations team initially fielded the request.

That morning, Robinhood suspended trading of the so-called “meme stocks” which had gained value so quickly.

“We got back, we put our heads together,” Tenev said. “Our chief operating officer said, ‘Let’s call the higher-ups at the NSCC and figure out what’s going on, maybe there is some way we can work them.'”

Other platforms, including Webull and TD Ameritrade, also placed some restrictions on GameStop and other stocks that day.

Risk of sanctions from FINRA

Those recent comments could come back to haunt Tenev.

“That suggests he has a significant managerial role with respect to the broker-dealer” subsidiary, according to James Tierney, who until last year worked at the SEC’s general counsel office, including in FINRA enforcement matters against individuals who failed to register with FINRA.

Tierney, now an assistant professor of law at the University of Nebraska College of Law, said in an email that this would be a “pretty solid basis for FINRA to try to go after him for failure to register…even if Robinhood is trying to keep the parent and subsidiary formally separate.”

Beyond doing interviews with the media, including CNN, Tenev frequently communicates with customers through blog posts on Robinhood. Earlier this week, Tenev explained in a blog how Robinhood’s clearinghouse deposit requirements “skyrocketed overnight” and made the case for real-time trade settlements.

Tierney points out that the SEC has long held that FINRA requires registration for people who solicit customers, including through marketing and communications.

“FINRA’s registration rules aren’t, and shouldn’t be, designed to let executives hide behind corporate formalities to do things that’d require registration if they were mere salespeople at smaller firms,” Tierney said.

FINRA has the authority to impose fines, call for an audit or even refer matters to the Securities and Exchange Commission. If any of that happened to Robinhood, it could complicate its rumored plans for an IPO.

“Even though they are self-regulatory, don’t take FINRA lightly,” said Whitehead, the Cornell professor. “If FINRA steps in and sanctions them, that creates big issues.”

Sax, the former FBN compliance chief, said the fact that Tenev is not registered with FINRA raises questions about the agency’s oversight.

“I hold FINRA responsible for why the hell they are allowing this guy to operate without being licensed,” he said.

CNN Business asked FINRA specifically about Robinhood and Tenev, but the agency declined to comment.

Scrutiny on the startup

It’s clear that FINRA is keeping a close eye on Robinhood.

In 2019, FINRA fined Robinhood $1.25 million for sending customer trading orders to four broker-dealers without guaranteeing the best price. The settlement drew attention to the controversial practice at Robinhood and other online brokers of routing orders to high-frequency traders in exchange for payment, known as payment for order flow.

At the time of the sanction, Robinhood said in a statement that the settlement did not “reflect our practices or procedures today.”

Without naming Robinhood, FINRA said in a report released this week that the agency is evaluating “app-based platforms with interactive or ‘game-like’ features that are intended to influence customers, their related forms of marketing and the appropriateness of the activity that they are approving clients to undertake.” FINRA said it is particularly interested in how those apps “address and disclose the associated potential risks to your customers.”

The comments are an obvious reference to Robinhood, which was accused by Massachusetts regulators in December of luring inexperienced investors with gaming elements such as colorful confetti. Robinhood said at the time it disagreed with the allegations.

Jonathan Macey, a corporate finance and securities law professor at Yale University, said the situation at Robinhood underscores “how inept regulators are at protecting individual investors.” However, he expressed doubt that the situation will be resolved by sanctions from FINRA.

“It’s like getting Al Capone for tax evasion,” Macey said. “It’s a fine thing to do, but unsatisfactory at some level.”

Article Topic Follows: Money

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