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May 21, 2013 at 06:34 AM
The Financial Industry Regulatory Authority announced Tuesday that LPL Financial must pay $9 million for 35 separate, “significant email system failures,” and for making material misstatements to FINRA during its investigation.
LPL was fined $7.5 million for not supervising its representatives, responding to regulatory requests and producing emails to customers in arbitration proceedings. LPL was also ordered to establish a $1.5 million fund to compensate brokerage customer claimants potentially affected by its failure to produce emails.
LPL neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
“As LPL rapidly grew its business, the firm failed to devote sufficient resources to update its email systems, which became increasingly complex and unwieldy for LPL to manage and monitor effectively,” FINRA states. LPL, FINRA says, “was well aware of its email systems failures and the overwhelming complexity of its systems.”
Consequently, FINRA found that from 2007 to 2013, LPL’s email review and retention systems failed at least 35 times, leaving the firm unable to meet its obligations to capture email, supervise its reps and respond to regulatory requests. “Because of LPL’s numerous deficiencies in retaining and surveilling emails, it failed to produce all requested email to certain federal and state regulators, and also likely failed to produce all emails to certain private litigants and customers in arbitration proceedings, as required.”
Brad Bennett, Executive vice president and chief of enforcement, said in a statement announcing the fine that as LPL grew, it did not expand its compliance and technology infrastructure, and as a result, LPL failed in its responsibility to provide complete responses to regulatory and other requests for emails.”
This case, Bennett said, “sends a strong message to firms to make sure your business does not outgrow your compliance systems.”
LPL released a statement the same day stating that in September 2011, LPL “reported to FINRA issues relating to the surveillance and retention of emails” and “cooperated fully with FINRA throughout its ensuing investigation.” LPL said that it ”recognizes the importance of having effective policies, procedures and systems to review and retain emails, and we very much regret our lapse of oversight.”
LPL has now “undertaken a comprehensive redesign of our email systems and associated compliance policies and procedures, and have engaged independent experts to assess and validate our approach.”
As noted in the LPL quarterly report for the three months ended March 31, 2013, LPL went on to say that it “recorded an expense related to the expected settlement of the FINRA matter in the Company’s financial statements as of and for the three months ended March 31, 2013.” Therefore, LPL said that it “does not anticipate any related charges in its operating results for the current quarter.”
