SIPC chief raises concerns to SEC about Robinhood’s free checking accounts

Harbeck’s tenure at the the Securities Investors Protection Corp., beginning as CEO in 2003, spans the liquidations of Lehman Brothers, Bernard L. Madoff Securities, and MF Global.

Cash balances sitting in accounts collecting interest for a long period of time also skirt the SIPC rules on what’s covered in the event of a collapse, Harbeck said. It may fall under the category of a loan because the brokerage can take that money and invest it income-generating investments like Treasury securities. A loan wouldn’t be covered by the fund. “We want to make sure that investors know there’s some risk there,” he told CNBC.

The SEC, which oversees SIPC, declined to comment.

Robinhood did not immediately respond to a call and email for comment.

Former Congressman Barney Frank, a key architect of the post-crisis financial reform that bears his name, raised flags about certain aspects of the new Robinhood products. He said SIPC insurance is overall, “less comprehensive” than FDIC insurance.

“If there’s any uncertainty about regulatory protection, there is serious potential for people to be misled,” Frank told CNBC.

Robinhood is built on the mission of democratizing finance and banking the under-banked. But the former congressman said that also means they may be reaching a less financially savvy audience who are less familiar with the risk of a non-FDIC insured product.

Robinhood accounts are SIPC-insured up to $250,000 but the agency does not guarantee customers would get their money back in every situation. Assets can be backed by one of the agencies — either the FDIC or SIPC — but not both.

“You’re reaching the people who tend to be unbanked and they might be less sophisticated financially, and not the people who would fully understand it,” Frank said. “There needs to be certainty — if there’s stuff that isn’t covered it needs to be in big bold on the top of the page.”

Fintechs are increasingly moving into banks’ territory. But they don’t always come under the same regulatory scrutiny. Frank highlighted the Community Reinvestment Act as one example, a law which requires commercial banks to meet needs of low-income customers and was meant to reduce discriminatory credit practices. But fintechs are largely exempt.

“Banks are now having to compete with someone who doesn’t have those obligations,” Frank said.

There’s also the lingering risk of financial stability after the financial crisis. Robinhood’s 3 percent interest rate may be heading in the right direction if the Federal Reserve raises its own benchmark rate. If not, the former lawmaker said the start-up could be incentivized to look into riskier, higher-yielding assets in addition to government-grade treasuries.

“Some of them are going to fail,” Frank said. “What kind of safeguards will we have to manage their level of risk?”

Robinhood’s CEO Baiju Bhatt told CNBC this week that 3 percent rate is “not a teaser,” but if there was any change to its interest rate policy it would clearly communicate that to customers.