Independent broker/dealer LPL Financial has been mired in regulatory issues over the last year. And it’s not over. Today, the Financial Industry Regulatory Authority sanctioned the firm and ordered it to pay $10 million for failing to supervise sales of non-traditional ETFs, variable annuities, non-traded REITs and other complex products. The firm is also ordered to pay $1.7 million in restitution to certain customers who purchased non-traditional ETFs.
LPL says the fine is the latest in a series of legacy issues the firm is working to resolve.
The fine was anticipated and was part of the $23 million charge announced in LPL’s third quarter 2014 earnings report, said LPL spokesman Brett Weinberg.
Last year, the company incurred $36.3 million in regulatory fines and restitution, four times the level of charges in the prior two years. In the first quarter 2015, the firm incurred $11 million in regulatory charges, including estimated losses related to past issues and legal and consulting fees during the period. CEO Mark Casady said he expects regulatory charges to remain elevated in 2015, as they work through past issues. But he doesn’t expect those charges to be as high in other quarters as they were in the first quarter.
FINRA claims the firm did not have the system in place to monitor holding periods for non-traditional ETFs in client accounts. The firm did not enforce limits on the concentration of those products, and failed to properly train advisors on the risks of the products, FINRA added.
In some instances, the firm also sold variable annuities without disclosing surrender charges, and used an automated surveillance system that excluded certain mutual fund “switch” transactions from supervisory review, FINRA said. In addition, the firm overlooked some non-traded REIT accounts that were eligible for volume sales charge discounts.
FINRA also found deficiencies in LPL’s review of trading activity, including the failure to generate alerts for certain high-risk activity.
“With today's action, FINRA reaffirms that there is little room in the industry for lax supervision and that it will not hesitate to order firms to review and correct substandard supervisory systems and controls, and pay restitution to affected customers,” said Brad Bennett, FINRA’s chief of enforcement.
“LPL has made a long-term commitment to rebuilding its risk management and compliance infrastructure, and this resolution is a significant step in that process,” Weinberg said.
In March 2014, FINRA fined the firm $950,000 for its failure to supervise sales of non-traded REITs, oil and gas partnerships, business development companies, hedge funds, managed futures and other illiquid investments. Last summer, the Illinois Securities Department ordered the firm to pay $2.8 million in fines and restitution for failing to maintain adequate records for its variable annuity exchange business and failing to enforce its supervisory system related to variable annuity exchange activities.
