Game Over: Robinhood Pays $7.5 Million to Resolve “Gamification” Securities Violations

On January 18, 2024, the MA Securities Division issued a consent order (the “Order”) resolving its pending allegations of securities violations against Robinhood, a popular commission-free investing and stock trading platform that provides investment and brokerage services through its titular smartphone application (“app”). Since its creation in 2013, Robinhood has experienced massive growth in its customer base, growing its userbase from approximately 1 million customer accounts in 2016 to roughly 23.3 million as of November 2023.¹ Robinhood’s industry-disrupting success was due, at least in part, to the notoriously usable, accessible, and satisfying user interface for its app-based trading platform. The company itself has attributed much of its industry-disrupting success to its user-friendly design philosophy.² According to the MA Securities Division, however, many of the app-features and prompts that Robinhood employed to attract and facilitate engagement with the investment platform (the “digital engagement practices”) went too far and amounted to improper “gamification”—the application of typical elements of game playing to other activities—of securities trading in violation of Massachusetts securities laws.

In particular, the MA Securities Division took issue with Robinhood’s:

• use of digital confetti that would rain down from the top of the screen after a customer completed their first stock trade;
• in-app offers of free stock rewards for new customers—highlighting the possibility to receive stocks such as “Microsoft, Visa, or Apple” despite a low probability of receiving shares of those companies—which then required customers to mimic the motion of “scratching off” a lottery ticket in order to reveal the free stock;
• advertisements promising existing customers the ability to earn up to $500 per year in additional free stock rewards by recommending the Robinhood app to others;
• creation of various lists of stocks, chosen based on their popularity on Robinhood’s platform, and then featuring those lists on the home screen of the application;
• use of various formats of “push notifications” to customer devices, often including popular “emojis” within the message, directing the customer to invest in a particular Robinhood-created list of stocks or describing specific changes in the value of stocks held in their accounts; and
• employment of a mechanism by which customers could improve their position on an early access waitlist by “tapping” a digital representation of a debit card displayed in the Robinhood app up to 1,000 times per day. The application displayed a message to customers who “tapped” on the card 1,000 times in a day that they were “out of taps today! Come back tomorrow if you’re feeling tappy.”³

The Order also details additional charges related to certain service outages and a cybersecurity breach.⁴

On the regulatory side, the Massachusetts Uniform Securities Act prohibits broker-dealers and investment advisors from engaging “in any unethical or dishonest conduct or practices in the securities, commodities or insurance business.”⁵ In 2020, the Massachusetts Secretary enacted an additional regulation, known as the “Massachusetts Fiduciary Rule,” which clarifies that “unethical or dishonest conduct or practices” include “[f]ailing to act in accordance with a fiduciary duty to a customer when providing investment advice or recommending an investment strategy, the opening of or transferring of assets to any type of account, or the purchase, sale, or exchange of any security.”⁶ The Fiduciary Rule further provides that, to satisfy such fiduciary duty, broker-dealers and investment advisors must “adhere to duties of utmost care and loyalty to the customer,” which include, among other things, “[m]ak[ing] recommendations and provid[ing] investment advice without regard to the financial or any other interest of any party other than the customer.”⁷

As a company, Robinhood makes its profits through rebates, margin interest, stock loans, uninvested cash, and cash management—all of which can become more lucrative as the platform gains more users and hosts more daily trading activity. While the digital engagement practices may have been effective at garnering new customers and additional trading, they were not tailored to consider—much less promote—the individual needs, goals, or risk profile of the customer. From the MA Securities Division’s perspective, Robinhood’s use of the digital engagement practices therefore violated the Massachusetts Fiduciary Rule by frequently and indiscriminately directing investors towards making trades (activity that served Robinhood’s financial interests) without taking into consideration the interests of any individual investor or failing to put into place sufficient safeguards to protect inexperienced investors.

The charges and settlement with Robinhood represent the latest development in a growing trend of concern amongst securities regulators regarding how modern broker-dealers and investment advisors interact with their customers in the digital age. Although the United States Securities and Exchange Commission (the “SEC”) has not enacted a fiduciary duty standard as extensive as that in Massachusetts, the SEC recently proposed new conflict of interest rules that, if adopted, will require broker-dealers and investment advisors to investigate whether their use of most forms of technology in investor interactions results in a conflict of interest that places the interests of the firm ahead of the investor’s interests and, if so, take affirmative action to eliminate or neutralize that conflict of interest.⁸ In his public comments accompanying the SEC’s proposed rules, Chair Gensler identified specific concern over the possibility that automated digital engagements with customers, such as “push” notifications or stock recommendations, could be leveraged by firms to subtly nudge investors into making decisions that benefit the firms’ own revenues, profits, and interests rather than the individual investor’s⁹—a hypothetical that is substantially similar to the course of action the MA Securities Divisions alleged Robinhood had engaged in.

Given the overwhelming growth in customers and engagement Robinhood enjoyed over the past decade, broker-dealers and investment advisors may feel driven to remodel their own digital investment platforms to promote similar usability and engagement. However, the rules governing the line between effective and problematic engagement practices are still being developed, and ultimately may result in diverging or overlapping standards as both state and federal securities regulators weigh in. Broker-dealers and investment advisors subject to state or federal securities regulation are encouraged to work closely with counsel to both stay up to date on the relevant rules and conduct compliance reviews of any contemplated app-features or engagement practices that may run the risk of drawing a skeptical eye from regulators.

¹Press Release, Robinhood Markets, Inc., Robinhood Markets, Inc. Reports November 2023 Operating Data (Dec. 13, 2023), https://investors.robinhood.com/news/news-details/2023/Robinhood-Markets-Inc.-Reports-November-2023-Operating-Data/default.aspx.

²See Rich Bessel, The top secret Robinhood design story, Robinhood (Apr. 14, 2021), https://newsroom.aboutrobinhood.com/the-top-secret-robinhood-design-story/.

³See Consent Order, In re Robinhood Financial LLC, Nos. E-2020-0047, E-2022-0006, at 6–7 (Mass. Sec’y of the Commw., Secs. Div. Jan. 18, 2024), https://www.sec.state.ma.us/divisions/securities/download/RH-Consent-Order.pdf.

⁴Id. at 9–19.

⁵Mass. Gen. Laws ch. 110A, § 204(a)(2)(G).

⁶950 Code Mass. Regs. § 12.207(1)(a).

⁷950 Code Mass. Regs. § 12.207(2)(b)(3).

⁸See generally Algorithmic Allegiances: Proposed SEC Rule to Regulate Conflicts of Interest in Technology, Vinson & Elkins LLP: Regulatory Roundup (Aug. 14, 2023), https://www.velaw.com/insights/algorithmic-allegiances-proposed-sec-rule-to-regulate-conflicts-of-interest-in-technology/.

⁹Id.