Robinhood's checking account poses legal issues: SIPC chief

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The fintech Robinhood Financial’s plan to offer a checking account that pays 3% interest with no federal deposit insurance may run into legal problems, according to the head of the Securities Investor Protection Corp.

Robinhood announced the new checking and savings account on Thursday and said funds deposited there would receive backing from the SIPC. But Stephen Harbeck, the CEO of the SIPC, told American Banker on Friday that it is incorrect and that SIPC would not provide protection.

Moreover, Robinhood executives never contacted SIPC to apply for the Washington-based organization's funds protection, or to discuss its plans for the product, Harbeck said.

Harbeck said that, upon learning of Robinhood’s checking account product, he contacted the trading and markets division of the Securities and Exchange Commission to alert officials there to potential securities violations.

Robinhood’s statement on its website that “the funds in your Robinhood Checking & Savings balances can be used to invest in stocks” means that the product is an investment fund and would trigger SEC oversight, Harbeck said.

“I’m sure the SEC will be discussing this today,” Harbeck said.

The SEC did not immediately respond to a request for comment. Jack Randall, a spokesman for Robinhood, declined to comment.

SIPC’s funds-protection program is not the same as the Federal Deposit Insurance Corp.’s deposit insurance, Harbeck said. SIPC will only reimburse investors for the value of their funds on the date that a brokerage fails, and not the original amount of the investor’s deposit.

“SIPC protects cash that is deposited with a brokerage firm for one limited purpose, to purchase securities,” Harbeck said. “Cash deposited for other reasons would not be protected. SIPC does not protect checking and savings accounts.”

The SIPC is a federally mandated organization whose mission is to keep investors solvent in the event of the collapse of a brokerage firm. It requires registered broker-dealers to pay assessments to fund its operations. It is not a regulator nor a self-regulatory organization.

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