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Robinhood is facing a corporate backlash against its free stock program and regulators are circling

Robinhood logo stocks investingREUTERS/Dado Ruvic/Illustration

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Regulators are looking into Robinhood's practice of offering new users free shares following complaints by companies, according to a new report in the Wall Street Journal.

Led by Florida drugmaker Catalyst Pharmaceuticals, some companies gripe that Robinhood's free-stock program, which awarded users $78 million in free shares in 2020, is becoming an expensive headache because of the cost of providing documents. 

After Catalyst and others complained to the Securities and Exchange Commission, the agency in August approved a new rule by the New York Stock Exchange stopping brokers from seeking compensation for documentation costs when shares are given away for free, according to the Journal.

Under typical circumstances, brokers pay third-party providers to deliver materials — in this case, annual proxy statements ahead of shareholder meetings — to investors. Those costs are later covered by the companies.

Because Robinhood is not an NYSE member, the new rule does not immediately apply to it. But another regulator, finance's self-regulatory body FINRA, is coming under increasing pressure to adopt an NYSE-like rule for the whole industry.

"We don't expect the reimbursement exemption to impact us significantly, even if it were to be adopted by other regulators," a Robinhood spokesman told the Journal.

One company that complained to the SEC, Marathon Oil Corp., said that its cost of distributing proxy statements exploded 25-fold between 2019 and 2020, driven by hordes of new Robinhood investors.

The investor documentation industry is dominated by Broadridge Financial Solutions, which has a 90% market share in delivering proxy statements, according to a recent Financial Times report. Robinhood is unique in that it is one of few brokers not using Broadridge, which charges up to the NYSE maximum of $0.25 per investor email. 

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