LPL Financial LLC a securities broker dealer headquartered in Fort Mill South Carolina has been censured and fined $6,500,000.00 based in part on findings that LPL failed to supervise its stockbrokers’ dissemination of consolidated reports to customers resulting in some of its customers being defrauded by an LPL stockbroker. Letter of Acceptance Waiver and Consent No. 2018059192701 (Dec. 31, 2020).
According to the AWC, LPL and other securities broker dealers were notified by FINRA that consolidated reports contain serious risks of misleading or confusing customers as the information contained on those reports often covers assets that are held by customers at their securities firm and elsewhere. FINRA indicated that customers might assume that the values of assets held away from the securities broker dealer are verified when this might not be the case.
LPL knew that if it could not validate data for assets held at other institutions, then it was required by FINRA to indicate in consolidated reports that those reports contained unverified assets. The regulator also warned that if the securities broker dealer could not supervise stockbrokers’ dissemination of consolidated reports, then the firm would be required to prohibit those reports from being disseminated. The AWC stated that LPL knew about these warnings as it was censured and fined $10,000,000.00 in 2015 by FINRA for failure to supervise consolidated reports.
According to the AWC, from May of 2015 to December of 2020, LPL permitted consolidated reports to be disseminated to customers only when using a third-party vendor or when using an LPL proprietary system. The AWC stated that third-party vendors created consolidated reports using data from LPL Financial and other financial institutions. But those vendors allowed for LPL stockbrokers to make changes and additions to the reports. This allowed for stockbrokers to add incorrect information about customers’ securities, insurance policies, and bank accounts or other personal assets.
LPL was responsible for validating final reports before they were disseminated to customers. Stockbrokers circumvented these rules by generating non-final reports that did not clearly identify that asset information was not verified. LPL also lacked an adequate system for determining when customers were provided with non-final reports. When stockbrokers made final reports, the securities broker dealer still did not review them for manually-added assets unless those assets were marked as securities-related. FINRA indicated that thousands of reports were not reasonably reviewed by LPL before being provided to customers.
The AWC revealed that a stockbroker exploited LPL’s supervisory failures relating to consolidated reports. That stockbroker provided customers with consolidated reports containing fake assets as part of a Ponzi scheme. FINRA noted that the stockbroker pleaded guilty to securities fraud after being barred for converting more than $1,000,000.00 from LPL customers. FINRAs’ supervisory failures pertaining to consolidated reports constituted the violation of FINRA Rules 2010 and 3110.
FINRA also revealed that between January of 2014 and September of 2019, LPL failed to maintain and preserve electronic records. This affected 87,000,000 records. At least 1,500,000 customer communications had been permanently deleted because of this. The regulator also noted that 1,000,000 customers were not provided with account notices relating to suitability. The securities broker dealer violated Securities Exchange Act of 1934 Rules 17a-3 and 17a-4 and FINRA Rules 2010 and 4511 for this reason.
The regulator indicated that this is not the first time that LPL has been censured for failing to preserve records and failing to send account notices pertaining to suitability. Between May of 2015 and December of 2016, it was censured twice and fined a total of $1,650,000.00 by FINRA based upon findings of supervisory failures in this respect.
