LPL Financial LLC, a FINRA member since 1973 headquartered in Boston, MA, conducts general securities business via 18,343 registered reps operating out of roughly 10,702 registered branch offices and 18,396 non-registered office locations. The firm was censured and fined $10M after consenting to FINRA’s findings concerning the firm’s failure(s) to adequately supervise ETF, variable annuity, mutual fund, and non-traded REIT transactions; failure to implement systems for review and accurate reporting of trades; failure to implement adequate systems to monitor for certain suspicious activity; failure to ensure that regulators were being sent complete and accurate information regarding the firm’s variable annuity transactions; failure to adequately supervise its advertising efforts; failure to comply with certain registration requirements; and failure to comply with Rule 204 of Regulation SHO. FINRA Letter of Acceptance, Waiver, and Consent No. 2013035109701 (May 6, 2015).
According to the AWC
According to the Letter of Acceptance, Waiver, and Consent (“AWC”), from April of 2010 through April of 2015, the Firm had failed to adequately supervise sales of non-traditional ETFs. Specifically, the Firm reportedly disregarded any review of the amount of time that its clients held the securities, where some of the clients held their positions in these securities for longer than a year. The AWC noted that despite the fact that the firm had procedures to monitor non-traditional ETFs held by clients on a daily basis, these procedures (during the relevant period) did not include a supervisory procedure for monitoring holding periods for customers.
According to FINRA
Non-traditional ETFS are products which seek to return a multiple of the performance of an underlying benchmark or index, the inverse of performance, or both, and use swaps, futures contracts and other derivative instruments to achieve these objectives. Because most of the non-traditional ETFS are designed to achieve their stated objectives only on a daily basis, FINRA believes that the products are typically not appropriate for intermediate or long-term investing in a brokerage account. Further, given the effects of compounding, performance of non-traditional ETFs can substantially differ from performance of the index or benchmark the investment is tied to which can cause magnified effects during volatile markets.
According to the AWC, LPL also failed to follow their own procedures regarding allocation limits, which were supposed to prevent excess allocations into the non-traditional ETF investments, even for those with growth/trading investment objectives. Further, according to the AWC, the firm had failed to make sure that their registered reps were reasonably trained for purposes of selling the non-traditional ETFs. The AWC noted that the firm failed to abide by its own procedures to have its reps complete a training course prior to purchasing/holding the non-traditional ETFs in client accounts. The AWC indicated that some of the reps did not complete such training prior to engaging in the sales. FINRA found LPL’s conduct in this regard to have violated FINRA Rule 2010 and NASD Rule 3010(b).
LPL, according to the AWC, had supervisory failures associated with the sales of variable annuity contracts that were being funded via other mutual funds or annuity contracts. The AWC noted that the firm did not abide by its own policies for representatives to disclose whether customers would be facing fees (commonly known as surrender fees) or sacrificing benefits, such as “death benefits” or “living benefits” in the course of surrendering one annuity to pay for another variable annuity recommended by LPL’s staff. The AWC indicated that the firm had even failed to disclose to clients that they would incur surrender fees via the exchange of variable annuity contracts for new contracts. FINRA found LPL’s conduct in this regard to have violated FINRA Rule 2330(c) and 2010 along with NASD Rule 3010(b).
The AWC further stated that LPL’s failures had included the failure to deliver prospectuses to customers buying non-traditional ETFs, failures associated with using an error prone automated surveillance system that had excluded mutual fund “switch” transactions from supervisory review (violating FINRA Rule 2010 and NASD Rule 3010(b)), failing to reasonably supervise Class C mutual fund shares (violating FINRA Rule 2010, 2110, and NASD Rules 3010(a) and (b)), and failing to supervise the sales of non-traded real estate investment trusts (“REITS”) by failing to identify accounts eligible for volume sales charge discounts (violating FINRA Rule 2010, 2110, and NASD Rules 3010(a) and (b)).
Additionally according to the AWC, LPL’s systems for reviewing trading activity in customer accounts was deficient. Specifically, LPL had used a faulty surveillance system which had failed to generate alerts for high-risk activity which included actively traded accounts, low priced equity transactions, concentrated positions and potential employee front-running. FINRA also alleged the OSJ managers and OSJ delegates would self-review (their own) trades and related tasks, and that the firm had failed in conducting reasonable reviews of the firm’s trade blotter. FINRA found the firm had violated FINRA Rule 2010, 2110, and NASD Rules 3010(a) and (b) for such conduct.
Prior LPL Misconduct
This is not the first time LPL has been reprimanded for misconduct. Just recently in June of 2014, the firm was censured and fined $2M by Illinois Securities Department after the firm, during January of 2008 through July of 2012, was alleged to have failed to reasonably maintain certain records and books documenting the firm’s variable annuity exchange business, and failed to enforce supervisory systems pertaining to documentation of the variable annuity exchange transactions executed by sales persons. File No. 1200385 (June 2014).
Additionally, in March of 2014, the firm was censured and fined $950,000 by FINRA after consenting to FINRA findings that from January of 2008 through July of 2012, the firm had failed to implement a reasonable supervisory system concerning the alternative investment sales for compliance with FINRA suitability requirements per NASD Rule 2310. FINRA Letter of Acceptance, Waiver, and Consent No. 201102770901 (March 2014). The AWC noted that the firm did not have adequate procedures for determining whether the purchases of such alternative investments had complied with LPL’s concentration limits, prospectus, and suitability standards.
In February 2013, LPL was fined $500,000 by the Massachusetts Securities Division and ordered to pay roughly $2M in restitution after being found to have sold non-traded REITS in violation of Massachusetts suitability criteria, which included annual concentration and income limits. See Order No. E-2012-0036 (February 2013).
Finally, in December of 2012, FINRA found that LPL, from January of 2009 through January 2011, had failed to establish and enforce adequate supervision systems for ensuring mutual fund prospectuses were delivered to certain of the firm’s customers, as required by Section 5(b)(2) of the Securities Act of 1933. FINRA Letter of Acceptance, Waiver, and Consent No. 2011029101501 (December 2012).
