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What is a 'Wells notice' and why did Robinhood just receive one?

By Weston Blasi

The popular stock-trading app received bad news from the SEC a few days before it reported quarterly earnings

What is a "Wells notice"? In short, something a company does not want to receive.

A Wells notice is a formal notification issued by the U.S. Securities and Exchange Commission to inform a person or company that they were involved in a completed investigation by the regulator. The notice is given when infractions have been discovered by the SEC, and it provides the company or individual a chance to address the investigation publicly before any rulings are levied.

It's named after the Wells Committee, an advisory group created in 1972 to review the enforcement practices of the SEC. The committee itself was named after the SEC's general counsel at the time, John A. Wells.

Robinhood Markets Inc. said it received a Wells notice on May 4 over a previously disclosed investigation by the SEC into the company's cryptocurrency listings, custody of cryptocurrencies and platform operations, among other topics.

Essentially, the notice gives Robinhood (HOOD) the opportunity to respond to the investigation before the SEC makes a formal declaration on its findings.

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The financial-services company responded to the Wells notice from the SEC on Monday morning.

"After years of good faith attempts to work with the SEC for regulatory clarity including our well-known attempt to 'come in and register,' we are disappointed that the agency has decided to issue a Wells Notice related to our U.S. crypto business," Robinhood Chief Legal, Compliance and Corporate Affairs Officer Dan Gallagher said in a statement.

"We firmly believe that the assets listed on our platform are not securities and we look forward to engaging with the SEC to make clear just how weak any case against Robinhood Crypto would be on both the facts and the law," Gallagher added.

In an 8-K filing with the SEC, Robinhood claimed that potential action or punishment from the SEC stated in the notice may include "a civil injunctive action, public administrative proceeding, and/or a cease-and-desist proceeding and may seek remedies that include an injunction, a cease-and-desist order, disgorgement, pre-judgment interest, civil money penalties, and censure, revocation, and limitations on activities."

The SEC has argued that cryptocurrencies are securities and therefore fall under its regulatory purview. The SEC charged crypto firm Coinbase (COIN) in 2023 for illegally operating an unregistered securities exchange.

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Robinhood zoomed past Wall Street's expectations for the first quarter. The company earned $157 million, or 18 cents a share, in the quarter, up from a loss of $511 million, or 57 cents a share, in the first quarter of 2023. FactSet analysts expected earnings of 6 cents a share.

Robinhood's revenue jumped 40% to $618 million, beating FactSet analyst expectations of $553 million, the company said.

"Our 2024 expense plan includes growth investments in new products, features and international expansion while also getting more efficient in our existing businesses," Robinhood said.

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-Weston Blasi

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.


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05-09-24 1057ET

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