FINRA Fines LPL Financial Nearly $1,000,000 for Supervisory Short-Falls

Many times when we hear about regulatory actions being leveled against investment firms, we often think of the old guard of financial institutions such as UBS AG or Credit Suisse. We have certainly heard those names bandied about in the media a great deal lately. Sometimes though it is those companies that have not been around nearly so long that get caught committing regulatory infractions. Such is the case when last month the Financial Industry Regulatory Authority (FINRA) fined LPL Financial, LLC $950,000.

LPL is one of the nation’s largest broker/dealer investment firms. As such, they act in a custodial manner over more than 13,500 investment advisors, and this is the well-spring of their most recent regulatory infractions. The FINRA investigation found that LPL has failed to have supervisory standards in place pertaining to its sales of alternative investment products. According to the FINRA press release, these investment products include non-traded real estate investment trusts (REITs), oil and gas partnerships, business development companies (BDCs), hedge funds, managed futures, and other illiquid pass-through investments.

There are concentration limits for investors when it comes to these alternative investments. These limits are set by the type of alternative investment and some states also set limits. Even LPL sets its own concentration guidelines for its sales of alternative investments, yet the FINRA investigation revealed that from January 1, 2008 until July 1, 2012, LPL failed in its supervisory capacity to ensure that the concentration limits were met.

Initially, LPL used a manual review process to determine whether or not a particular investment met suitability standards, but the information upon which they relied was outdated and inaccurate. Once the company updated to an automated system, it was found that the database contained a programming error. As with the previous method, this database was not properly updated, therefore, it did not accurately show suitability standards. Furthermore, LPL failed to train its staff to assess state-mandated suitability standards as part of the company’s review of the suitability of alternative investments.

In a statement provided by LPL on March 24, 2014, spokeswoman Betsy Weinberger stated, “When the firm became aware of misconduct by the referenced financial advisor in his non-traded real estate investment trust transactions, the firm promptly terminated the advisor. He has been barred from the industry.”

Although this has the ring of immediate action, the same statement declares that at the beginning of 2012, LPL began a “rigorous review of the firm’s supervisory policies and procedures regarding the processing and sale of alternative investments.” Yet, as the FINRA press release revealed, these actions continued on until at least July, 1, 2012. This indicates that the company had knowledge of the insufficiency of its practices for at least six months without enacting more stringent supervisory guidelines.

“We believe that the enhancements we have since made significantly strengthen our ability to review the suitability of these transactions and ensure that sales of these products in the future comply with all applicable requirements,” said Weinberger, yet LPL Financial LLC neither admitted nor denied the charges, but did consent to the entry of FINRA’s findings.

Unfortunately for LPL, this is not the first time they have gone awry of regulatory agencies. In fact, for a company that only formed from a merger in 1989, the list of actions taken against LPL is quite extensive including 44 other regulatory events and 46 incidents of arbitration. These regulatory issues have resulted in tens of millions of dollars in fines, penalties, and restitution to clients. As with this most recent action by FINRA, many of the regulatory issues that LPL has faced over the years are the result of supervisory deficiencies. In one action alone, FINRA fined LPL $7.5 million and ordered them to place $1.5 million into an escrow fund to compensate investors who may have been impacted by LPL’s supervisory failures. Of course, with $4.1 billion in revenue reported by the company in 2013, the amount of money they have paid out over the years would seem to hardly scratch the surface of the company’s profit ratio. (investmentnews.com, Feb. 11, 2014)

Just because the profit ratio seems to be withstanding the proverbial heat in the kitchen, such may not be the case for all areas of the company. One recent report stated that LPL has been struggling to recruit advisors during the first quarter of the year. In an investor presentation posted on the company’s website, LPL stated said that its “advisor pipeline for 2014 remains healthy, but momentum slowed in part due to disruptive weather.” Snow or no snow, LPL’s recruiting deficit is surely effected by its continued supervisory woes coupled with its focus on recruiting high-end advisors who represent wealthy investors or those advisors who service retirement plans. Any broker/advisor who is savvy enough to woo high-end clients is surely savvy enough to think long and hard about making a move to a firm so fraught with so much regulatory controversy.

Additionally, LPL recently bought out the contracts of three of its top executives by offering them substantial compensation to terminate their contracts. (Rueters, March 12, 2014) The company released a proxy statement which claimed that this decision was to align more closely with market practices and to eliminate compensation discrepancies with other executives. Yet, there is bound to be speculation that these particular heads are rolling to make it appear as though LPL is making management changes in an effort to meet the expectations of FINRA, investors, and those perspective high-end advisors who LPL is hoping to recruit.

In related news, LPL Financial executive, Derek Bruton, abruptly resigned from his position. As the managing director for independent advisor services, he was responsible for overseeing almost 14,000 representatives and financial advisors. He was also responsible for expanding LPL’s hybrid broker business.

LPL claimed that the company “permitted Bruton to resign, effective immediately, in light of the company’s concerns about Mr. Bruton’s interactions with other employees,” the company said in a filing late Friday with the SEC. “His separation was not related to the company’s performance.”

Bruton’s exit came as a surprise to advisors in light of a tweet he sent out on March 24th entitled “How to nail your next speaking engagement.” The very next day, e-mails sent to him were returned with an automatic response stating he was out of the office and referred contacts to other executives within the company.

As part of the FINRA sanction, LPL has been directed to conduct an extensive review of its policies, systems, procedures, and training, and then remediate the problems that currently exist. Whether or not anyone can expect this action to resolve these issues is uncertain as LPL has been given similar instructions in past regulatory actions, yet the lack of appropriate supervision has continued.

If you feel like you have suffered financial losses as a result of LPL Financial, LLC’s supervisory deficiencies, please call us at the Blum Law Group at 877-STOCK-LAW for a free consultation.