Lawmakers press Robinhood about investor protections on trading platform

Several federal lawmakers pressed Robinhood Financial Inc. on Monday to improve investor protections on the trading platform in the wake of the recent suicide of one of its users.

In a letter to Robinhood co-founders Vladimir Tenev and Baiju Bhatt, four member of the House of Representatives and two senators expressed concerns that the reforms Robinhood outlined in a June 19 statement don’t go far enough to establish safeguards for investors who can execute complex trading strategies on the site.

“A number of serious questions remain as to whether these proposed changes will have any meaningful impact on the way your platform enables and encourages inexperienced investors to engage in high-risk trading,” states the letter from Rep. Brad Sherman, D-Calif. and chairman of the House Financial Services Subcommittee on Investor Protection, Entrepreneurship and Capital Markets.

The letter --- also signed by Reps. Bill Foster, D-Ill., Sean Casten, D-Ill. and Lauren Underwood, D-Ill. , and Sens. Richard Durbin, D-Ill., and Tammy Duckworth, D-Ill. – outlines 10 areas in which the lawmakers want more information, including how Robinhood approves users for different levels of options trading.  

Robinhood promised to overhaul the way that customers can access options trading following the June death of Alex Kearns, who took his own life after believing he had lost $730,000 on complex positions.

But the lawmakers said that a “lack of safeguards” on the Robinhood site corresponds with Robinhood users engaging in “much more high-risk and frequent trading activity relative to customers of other retail brokerages.” They also expressed concern that Robinhood “seems to be reaping outsized revenues” from payments for sending trades to third parties to execute.

“This dynamic underscores the need for Robinhood to prove that it is taking every appropriate step to make sure its customers are not being put in harm’s way,” the lawmakers wrote. “For Alex Kearns and all of its users, Robinhood must do better.”

A Robinhood spokesman said the company would cooperate with the legislators.

"We take our responsibility to our customers seriously and will work with the representatives and senators to address their questions and concerns," Robinhood said in a statement.

Robinhood has recently experienced strong user growth and substantial new investment.

At a recent hearing of Sherman’s subcommittee, Casten read from Kearns' suicide note and asked Securities and Exchange Commission Chairman Jay Clayton what the agency was doing “to ensure that people like Alex can’t get exposed like that again?”

Clayton responded: “We and [the Financial Industry Regulatory Authority Inc.] are looking at this kind of disclosure. Let me just say this, I read that over the weekend. We need to do something to make sure that these kinds of things” don’t happen.

“Disclosure is only good if people can understand it. You have to be able to make an assessment whether somebody can understand it,” Clayton said.

[More: Regulators should take a harder look at Robinhood]