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Beyond Robinhood: SEC Oversight in the FinTech Industry

With SEC claims on the rise and the recent Whistleblower amendments, FinTech businesses will be well-served by reviewing their compliance operations and consulting with counsel as needed to mitigate avoidable risk. 

Is 2021 the year that we start to bridge the divide between Washington DC and Silicon Valley? It very well may be.

Growing SEC Scrutiny of FinTech Calls for Stronger Compliance Measures

It is more imperative than ever for financial technology businesses to be mindful of regulatory compliance. As FinTech businesses continue to innovate, CEOs and founders ought to consider how to bake in the compliance and regulatory costs from the outset, given the high costs of noncompliance. The recent trend of the Securities and Exchange Commission’s (SEC) scrutiny on FinTech demonstrates the need for businesses to prioritize compliance operations. Further, while perhaps the return is more speculative, businesses should also consider their investments in human capital, as these may help mitigate the risk of a disgruntled employee being falsely incentivized to seek whistleblower awards by unnecessarily drawing regulator attention.

SEC Claims Surge Thanks to New Rules

The potential for SEC disciplinary action grows every year. Despite challenges presented by the global pandemic, the agency processed more claims in 2020 than in any previous year. The Commission’s whistleblower program (which was newly amended on December 7, 2020) has gained momentum and provides whistleblowers with financial incentives for coming forward with original information that leads to successful enforcement actions. Since awards range from 10 percent to 30 percent of the total monetary sanctions collected in the SEC’s action, we have seen enforcement actions and award amounts continue to surge. The latest amendments reflect the SEC’s objective of removing procedural barriers that hinder whistleblowers from receiving awards. Whereas whistleblowers were only previously eligible to receive awards for prosecution actions, the changes deemed that a Department of Justice (DOJ) non-prosecution agreement (NPA) or deferred prosecution agreement (DPA) entered into after July 21, 2010, is an administration action that may be a “related action” that is eligible for a whistleblower award from the SEC. In other words, whistleblowers are now eligible for awards based on non-prosecution actions as well.

See here for the SEC press release.

SEC Awards $9.2 Million to Whistleblower for Non-Prosecution Action

Following the Whistleblower amendments, the SEC started 2021 with a bang. The Commission has already issued an award of over $9.2 million to a whistleblower who supplied information about an ongoing fraud to the SEC that led to successful actions by the DOJ. That award marks the Commission’s first whistleblower award under the new amendments. According to Jane Norberg, Chief of the SEC’s Office of the Whistleblower, “This award reflects the Commission’s determination that a whistleblower’s eligibility for an award should not depend on the procedural vehicle a federal agency selects to resolve an enforcement matter. Deserving whistleblowers, like today’s awardee, will be rewarded regardless of the path used to successfully conclude the matter.”

Since the inception of the Whistleblower Program in 2010, the SEC has awarded more than $750 million to 142 individuals. During the Trump administration, the Commission issued the six largest awards in the program’s history—ranging from $33 million to $114 million.

Robinhood Implements New Compliance Operations After SEC Charges

Separate from the Whistleblower Program developments, Robinhood Financial LLC (Robinhood), the popular free trading app, has been the subject of SEC scrutiny. In early March 2021, Gary Gensler, President Biden’s nominee for the Chairman of the SEC, stated during testimony before the Senate Banking Committee that it would be worthwhile to scrutinize Robinhood’s business model in light of the GameStop Corp. “Reddit rally” earlier this year.

Furthermore, in December 2020, Robinhood entered into a cease-and-desist order with the SEC and paid $65 million to resolve allegations that it failed to disclose payments from trading firms in exchange for customer order flow, and failed to seek the best terms to execute orders. Subsequently, the CEO of Robinhood, Vlad Tenev, publicly explained that the matter was based solely on historical practices that do not reflect Robinhood’s model today, and that the company has been making changes to step up its compliance operations, including staffing compliance officers and a chief legal officer.

As to the implications for the overall FinTech industry, the director of the SEC’s San Francisco regional office stated that: “There are many new companies seeking to harness the power of technology to provide alternative ways for people to invest their money, but innovation does not negate responsibility under the federal securities laws.”

With SEC claims on the rise and the recent Whistleblower amendments, FinTech businesses will be well-served by reviewing their compliance operations and consulting with counsel as needed to mitigate avoidable risk. 

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