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According to Wall Street Journal, regulators are investigating Robinhood's practice in offering new users free shares.
Robinhood's free stock program has been criticized by some companies as an expensive hassle due to the high cost of providing documentation.
The NYSE passed a rule in August that prohibits brokers from seeking reimbursement for documentation costs when shares are freed. However, this doesn't directly apply to Robinhood, which is Nasdaq-listed.
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According to a Wall Street Journal report, regulators are investigating Robinhood's practice in offering users free shares after companies complain.
Catalyst Pharmaceuticals in Florida is leading the charge. Some companies complain that Robinhood's free stock program, which gave users $78,000,000 in 2020 in free shares, has become a costly headache due to the high cost of providing documentation.
Catalyst and other complainants to the Securities and Exchange Commission in August, the agency approved a new rule from the New York Stock Exchange that prohibits brokers from seeking reimbursement for documentation costs when shares have been given away free of charge, according to The Journal.
In most cases, brokers pay third party providers to deliver materials to investors. This is the case for annual proxy statements, which are sent ahead of shareholder meetings. These costs are covered later by the companies.
Robinhood is not a member of the NYSE so the new rule will not apply immediately to Robinhood. FINRA, the finance industry's self-regulatory organization, is being pressured to adopt a rule similar to the NYSE for the entire industry.
Robinhood spokesperson told the Journal that the reimbursement exemption does not expect to have a significant impact on us, even if adopted by other regulators.
Marathon Oil Corp. complained to the SEC that its costs of publishing proxy statements had risen 25-fold between 2019 & 2020 due to new Robinhood investors.
Broadridge Financial Solutions dominates the investor documentation market. According to a Financial Times report, Broadridge has a 90% market share in proxy statements delivery. Robinhood is the only broker that does not use Broadridge. Broadridge charges $0.25 per investor email.
