Free stock-trading app maker Robinhood Market Inc. has agreed to pay a fine of $65 million as part of a settlement with the U.S. Securities and Exchange Commission over allegations that it deceived customers about how it makes money and failing to deliver on a promise of best execution of trades.

The investigation into Robinhood was first reported in September. The SEC was said at the time to be investigating allegations that Robinhood previously failed to disclose its practice of selling clients’ orders to high-speed trading firms.

The company, which does not charge trading fees for users, makes money in other ways, including taking payments from trading firms to send them customer orders. That in itself is not illegal but it is illegal not to disclose the fact to clients, which Robinhood did not until 2018.

“Between 2015 and late 2018, Robinhood made misleading statements and omissions in customer communications, including in FAQ pages on its website, about its largest revenue source when describing how it made money — namely, payments from trading firms in exchange for Robinhood sending its customer orders to those firms for execution, also known as ‘payment for order flow,” the SEC said in a statement.

The SEC noted that Robinhood falsely claimed on its website between October 2018 and June 2019 that its execution quality matched or beat its competitors. “One of Robinhood’s selling points to customers was that trading was ‘commission free,’ but due in large part to its unusually high payment for order flow rates, Robinhood customers’ orders were executed at prices that were inferior to other brokers’ prices,” the statement added.

The order found that Robinhood provided inferior trade prices that in aggregate deprived customers of $34.1 million even after taking into account the savings from not paying a commission.

Under the settlement, in which Robinhood has not admitted or denied the allegations, Robinhood agreed to a cease-and-desist order prohibiting it from violating the provisions of the Securities Act of 1933 and the record-keeping provisions of the Securities Exchange Act of 1934. The company also agreed to retain an independent consultant to review its policies and procedures to ensure it was in compliance with those procedures.

In response to the settlement, Robinhood Chief Legal Officer Dan Gallagher said the settlement related to historical practices that do not reflect the company today. “We recognize the responsibility that comes with having helped millions of investors make their first investments, and we’re committed to continuing to evolve Robinhood as we grow to meet our customers’ needs,” he said.

The $65 million fine is pocket change for Robinhood, which as of its last venture capital round of $460 million in September, has now raised $2.2 billion, according to Crunchbase.

Photo: Robinhood