LPL Financial to Pay $11.7M Fine for Supervisory Failures

The Financial Industry Regulatory Authority Inc. said that LPL Financial (LPLA) must pay $11.7M in fines and restitution for widespread supervisory failures involving complex products sales. The self-regulatory organization said that from 2007 up to last month, the firm did not properly supervise certain exchange-traded funds, nontraded real estate investment trusts, and variable annuities. It also did not properly deliver over 14 million trade confirmations to customers and failed to properly supervise communications, including advertising, as well as the consolidated reports used by brokers.

According to the Letter of Acceptance, Waiver, and Consent, To grow LPL, its wholly-owned brokerage firm subsidiary, LPL Financial Holdings Inc. employed a strategy that included acquiring financial services firms, consolidating them with the broker-dealer, and bringing in more registered representatives. Unfortunately, said the SRO, the firm failed to dedicate enough resources to allow LPL to fulfill its supervisory duties.

As just one example, LPL did not have a system for either monitoring the duration of time customers held securities in accounts or enforcing concentration limits on complex products. Its system for reviewing trading activities in accounts had numerous deficiencies. Also, LPL did not submit trade confirmations in over 67,000 customer accounts.

In certain transactions involving variable annuities, LPL purportedly allowed sales to go through without disclosing surrender fees. With certain mutual fund “switch transactions,” the firm is accused of using an automated surveillance system that left these trades out of supervisory review. When supervising non-traded REITs, LPL did not identify which accounts were eligible to receive volume sales charge reductions. Also, LPL’s surveillance system did not issue alerts for certain activities that were high risk, did not keep track of trading activities that were overdue for supervisory review, failed to report certain trades to FINRA and MSRB, and neglected to give regulators full and accurate data about certain variable annuity transactions.

The penalty includes a fine of $10 million and restitution of $1.7 million to customers who bought certain ETFs. Following a review of procedures and systems, these customers may also receive more compensation. By agreeing to pay the fine, LPL is not denying or admitting to the findings.

With approximately 18,000 brokers in the U.S, LPL is one of the biggest brokerage firms in the country. This fine comes two years after the firm paid a $7 million for similar issues involving the way LPL monitored emails between customers and brokers. That was also the year that The New York Times reported that the brokerage firm had been subject to an unusual number of penalties from regulators for purportedly letting brokers sell complex products to investors who weren’t sophisticated enough for the financial instruments. Complex products tend to bring with them bigger commissions than mutual funds, which are less costly.

Read the FINRA Action (PDF)

More Blog Posts:
LPL Financial Should Pay $3.6M in Fines, Repayments for REIT Sales to Older Investors, Says NH Regulator, Stockbroker Fraud Blog, April 7, 2015

Ex-LPL Financial Adviser, James Bashaw from Texas, Lands at New Brokerage Firm, Stockbroker Fraud Blog, October 30, 2015

LPL Financial Ordered to Pay $7.5M FINRA Fine Over E-Mail Failures, Institutional Investor Securities Blog, May 22, 2013