More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
The Financial Industry Regulatory Authority announced Monday that it has fined LPL Financial LLC $950,000 for supervisory deficiencies related to the sales of alternative investment products, including nontraded real estate investment trusts (REITs).
As FINRA explains, many alternative investments, such as REITs, set forth concentration limits for investors in their offering documents, and certain states have imposed concentration limits for investors in alternative investments.
FINRA found that while LPL had established its own concentration guidelines for alternative investments, from Jan. 1, 2008, to July 1, 2012, LPL failed to adequately supervise the sales of alternative investments — which included REITs, oil and gas partnerships, business development companies (BDCs), hedge funds, managed futures and other illiquid pass-through investments — that violated these concentration limits.
As part of the sanction, LPL must also conduct a comprehensive review of its policies, systems, procedures and training, and remedy the failures.
“In order to sell alternative investments, a broker-dealer must tailor its supervisory system to these products,” said Brad Bennett, FINRA’s executive vice president and chief of enforcement, in a statement. “LPL exposed customers to unacceptable risks by not having an adequate system in place that could accurately review whether a transaction complied with suitability requirements imposed by the states, the product issuers and the firm itself – and it failed to train its registered representatives to apply all the suitability guidelines appropriately.”
In settling this matter, LPL Financial LLC neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
LPL said in a statement that it “is pleased to have resolved this matter following an investigation in which we cooperated fully with FINRA staff.” When LPL “became aware of misconduct by the referenced financial advisor in his nontraded real estate investment trust transactions, the firm promptly terminated the advisor. He has been barred from the industry.”
LPL states that beginning in 2012, LPL Financial “began a rigorous review of the firm’s supervisory policies and procedures regarding the processing and sale of alternative investments, including nontraded REITs. 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.”
FINRA says that LPL used a manual process to review whether an investment complied with suitability requirements, relying on information that was at times outdated and inaccurate. “The firm later implemented an automated system for review, but that database contained flawed programming and was not updated in a timely manner to accurately reflect suitability standards,” FINRA says.
LPL also did not adequately train its supervisory staff to analyze state suitability standards as part of their suitability reviews of alternative investments.
Check out BDs Subpoenaed on Alt Sales to Seniors on ThinkAdvisor.