Cash deposited in Robinhood's 3% checking and savings isn't insured, SIPC says

Cash deposited in Robinhood's new checking and savings product that was rolled out this week by the fintech investing platform is not insured by the Securities Investor Protection Corp., the nonprofit membership corporation said Friday.

Robinhood made headlines on Thursday when it announced that the new products can earn 3 percent, much better than what traditional banks offer on checking and savings accounts. It's also the highest yield among online banks and other fintechs known to provide generous deposit rates.

Robinhood's checking and savings products are not traditional bank accounts. They are simply separate balances held within a Robinhood brokerage account.

The company said Thursday that the cash held in these balances was insured by the SIPC, rather than the Federal Deposit Insurance Corp., which protects bank deposits.

But on Friday the SIPC – which oversees the liquidation of broker-dealers if they go bankrupt or close because of financial trouble – said the protection it offered Robinhood customers was narrower in scope.

"SIPC protects cash that is deposited with a brokerage firm for one limited purpose ... the purpose of purchasing securities," according to a statement from SIPC President and CEO Stephen Harbeck. "Cash deposited for other reasons would not be protected," he said in the statement. "SIPC does not protect checking and savings accounts since the money has not been deposited for a protected purpose."

Under the heading "Is my money insured?" on the Robinhood FAQ, the company said:

"Your cash in Robinhood is insured up to $250,000 by the Securities Investor Protection Corporation (SIPC). SIPC protects cash deposits in your account in the unlikely event that Robinhood fails."

In an interview with USA TODAY on Thursday, Baiju Bhatt, CEO and co-founder of Robinhood, reiterated: "The insurance amount is the same (as the FDIC) and it allows us to offer this high rate."

Robinhood did not contact the SIPC before publicly announcing its checking and savings products, Harbeck said Friday. Because the SIPC is not a regulator, Harbeck referred the matter to the Securities and Exchange Commission.

"It's more appropriate for the SEC to take the lead on this," he said.

Late Friday, Robinhood co-founders and CEOs Baiju Bhatt and Vlad Tenev said in a blog post that the company would postpone the checking and savings feature and said its previous announcement of its "cash management program...may have caused confusion."

"As a licensed broker-dealer, we’re highly regulated and take clear communication very seriously," the founders wrote. "We plan to work closely with regulators as we prepare to launch our cash management program, and we’re revamping our marketing materials, including the name."

The company took down its online sign-up for early access to the checking and savings product and replaced it with a early sign-up for its cash management program.

Calls to the Securities and Exchange Commission regarding the matter were not returned. The Financial Industry Regulatory Authority, of which Robinhood is a member, declined to comment.