In a letter to the heads of the Securities and Exchange Commission (SEC), the Federal Deposit Insurance Corporation (FDIC) and the Securities Investor Protection Corporation (SIPC), seven US Senators called for an examination of Robinhood’s recently announced plans to offer checking and savings accounts to individual consumers “under the guise of ‘cash management’” alongside its popular brokerage accounts. Robinhood introduced the new accounts in a post on the company’s blog on Dec. 13, 2018. While that original post appears to have been deleted from the company’s website (attempts to retrieve it today return a “couldn’t find the page you were looking for” error), it’s still available here, thanks to the good folks at the Internet Archive. As news outlets reported widely, the new product, initially called “Robinhood Checking & Savings,” offers 3% annual interest and no fees.
“Had they called us…”
According to a Bloomberg report on Dec. 13, 2018, on the new products, “Robinhood Checking & Savings will not be insured by the Federal Deposit Insurance Corp. Instead, because the product will be offered by the broker-dealer arm of the company, it will be insured by the Securities Investor Protection Corp., which covers brokerage accounts.”
The following day, however, on Dec. 14, 2018, Stephen Harbeck, President and CEO of the SIPC, told Bloomberg:
I disagree with the statement that these funds are protected by SIPC. Had they called us, I would have told them what I just told you in that I have serious concerns about this. This has gigantic ramifications for the banking industry.
Later that day, Robinhood posted a new blog post, which readers can still see, in which the co-founders said they would rebrand the offering as a “cash management program,” admitting that the previous announcement “may have caused some confusion.”
Senators’ Letter
The bipartisan letter, dated Thursday, Dec. 20, 2018, was signed by Sen. John Kennedy (R-LA), Sen. Jack Reed (D-RI), Sen. Robert Menendez (D-NJ), Sen. Mark Warner (D-VA), Sen. Brian Schatz (D-HI), Sen. Jerry Moran (R-KS) and Sen. Doug Jones (D-AL). The Senators noted:
Competition with traditional servicers like banks and credit unions can ultimately benefit consumers, but we must continue to maintain the integrity of our financial system as the digital revolution expands…
We commend SIPC for quickly and publicly explaining these accounts would not be insured.
In the strongest statement in the letter, the Senators further expressed:
We are concerned that rebranding Robinhood’s original announcement to cash management may simply be a way to circumvent regulatory scrutiny without offering full transparency to its customers. As of December 20, over 850,000 people have signed up for the waitlist for Robinhood’s new service, and some of these individuals may have signed up before Robinhood retracted its SIPC insurance claim and because they thought they would be getting “Robinhood Checking and Savings.” Marketing an investment account as a traditional checking or savings account can be misleading and confusing for consumers.
We find it remarkable that, in the process of offering a product intended to be insured by the SIPC, Robinhood never called the SIPC to inform the agency of its plans or to confirm whether or not such protections were indeed available. At the same time, we find it notable that the regulators were seemingly caught off guard by Robinhood’s latest foray toward expansion. The company is not some modest startup that could easily have been overlooked. According to Crunchbase, Robinhood has raised $539 million from investors since 2013, with the latest $363 million Series D round in May 2018, valuing the company at $5.6 billion according to Forbes. That round was led by DST Global, the investment firm founded by Russian billionaire Yuri Milner, and included other well-known, seasoned investors including Sequoia, Capital G (fka Google Capital), Kleiner Perkins and ICONIQ.
According to CNBC, UBS analyst Brennan Hawkins was the first and only major Wall Street analyst to cite “major holes” in Robinhood’s plan. Mr. Hawkins said he was “shocked by the speed at which SIPC responded, which is not a good sign for Robinhood.”
That shows that this was a really significant over-reach. We shouldn’t call it an about-face, but an epic fail.
*This article has been edited to correct the original description of DST Global as a Russian firm. DST Global is a global investment firm headquartered in Hong Kong. We regret the error.
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