LPL Financial LLC, a securities broker-dealer headquartered in Fort Mill, South Carolina, has been censured and fined $5,500,000.00 by Financial Industry Regulatory Authority (FINRA) because LPL Financial failed to supervise direct business transactions, provided false information to customers regarding mutual fund switch transactions, and failed to supervise Business Development Company (“BDC”) transactions. Letter of Acceptance, Waiver, and Consent No. 2017052494701 (December 27, 2023).
According to the AWC, LPL’s supervisory lapses primarily revolved around its oversight of direct business transactions. From January of 2012 to August of 2019, LPL did not implement a reliable supervision system to ensure that direct business transactions were accurately recorded on its daily trade blotter. This led to approximately 830,000 transactions not being monitored effectively, as they were not included in the firm’s exception reports. These reports were supposed to identify potential sales practice violations, including unsuitable trading.
Additionally, FINRA stated that LPL did not effectively supervise the collection of customer information, such as investment time horizon, age, and liquidity needs, which is meant to help determine the suitability of transactions. The firm depended on stockbrokers to gather this information through new account forms. However, LPL failed to ensure that these forms were correctly and consistently completed, leading to gaps in customer profiles necessary for determining suitability.
The AWC stated that LPL identified several transactions, particularly involving Class C mutual fund shares, which were potentially unsuitable for customers. The regulator indicated that LPL’s lack of oversight resulted in customers incurring approximately $546,000.00 in possibly excessive sales charges. Therefore, LPL violated FINRA Rules 2010 and 3110(a).
Also, between February of 2016 and June of 2020, LPL sent about 11,300 letters to customers that inaccurately stated the sales charges associated with switching from one security to a different security. LPL’s supervisory systems additionally failed to effectively monitor the suitability of switch transactions. The firm’s automated tools did not accurately reflect sales charge information for certain products, leading to a failure in detecting potentially unsuitable transactions. This resulted in customers paying approximately $31,000.00 in unwarranted sales charges. Therefore, the securities broker dealer violated FINRA Rule 2010.
FINRA also found that LPL insufficiently supervised transactions involving Business Development Companies (BDCs). From May of 2017 to November of 2022, the firm’s supervisory system was not adequately designed to ensure compliance with FINRA Rule 2111 and Regulation Best Interest. Specifically, LPL’s electronic tools did not effectively alert supervisors about recommendations involving high concentrations of BDC investments in accounts of customers with low-to-moderate risk tolerances. This led to 16 customers incurring $73,930.00 in realized losses. FINRA found that LPL violated FINRA Rules 2010 and 3110 and Securities Exchange Act Rule 15l-1.
