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LPL to Pay $12M FINRA Fine for Failing to Supervise Sales

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LPL Financial has been ordered to pay a $10 million fine to the Financial Industry Regulatory Authority for broad supervisory failures involving sales of nontraditional exchange-traded funds, certain variable annuity contracts, nontraded real estate investment trusts (REITs) and other complex products, as well as its failure to monitor and report trades and deliver to customers more than 14 million trade confirmations.

FINRA also ordered the San Diego-based LPL to pay nearly $1.7 million in restitution to certain customers who purchased nontraditional ETFs. LPL may pay additional compensation to ETF purchasers pending a review of its ETF systems and procedures.

LPL neither admitted nor denied the charges but consented to the entry of FINRA’s findings.

Brad Bennett, FINRA’s executive vice president and chief of enforcement, said in announcing the fine that “LPL’s supervisory breakdowns resulted from a sustained failure to devote sufficient resources to compliance programs integral to numerous aspects of its business.”

With Wednesday’s action, “FINRA reaffirms that there is little room in the industry for lax supervision and that it will not hesitate to order firms to review and correct substandard supervisory systems and controls, and pay restitution to affected customers.”

According to FINRA, at various times spanning multiple years, LPL failed to supervise sales of certain complex structured products, including ETFs, variable annuities and nontraded REITs.

With regard to nontraditional ETFs, “the firm did not have a system to monitor the length of time that customers held these securities in their accounts, did not enforce its limits on the concentration of those products in customer accounts, and failed to ensure that all of its registered representatives were adequately trained on the risks of the products,” FINRA states.

Also, LPL failed to supervise its sales of variable annuities, in some instances “permitting sales without disclosing surrender fees, and in connection with certain mutual fund ‘switch’ transactions, it used an automated surveillance system that excluded these trades from supervisory review.”

Also, LPL failed to supervise nontraded REITs by, among other things, failing to identify accounts eligible for volume sales charge discounts, FINRA states.

FINRA also found that LPL’s systems to review trading activity in customer accounts were “plagued by multiple deficiencies.” For instance, FINRA states that LPL used a surveillance system that failed to generate alerts for certain high-risk activity, including low-priced equity transactions, actively traded securities and potential employee front-running. The firm used a separate, but flawed, automated system to review its trade blotter that failed to provide trading activity past due for supervisory review. ”LPL failed to deliver over 14 million confirmations for trades in 67,000 customer accounts.” LPL Financial said in a statement that “this matter was anticipated, and the fine is part of the charges and accruals taken by the firm in prior quarters, including the $23 million figure announced in our 2014 third-quarter earnings.”

LPL stated that the firm “has reached a comprehensive agreement with FINRA to resolve a series of regulatory issues that we have already remedied, or are in the midst of working to remedy, as part of the settlement and our ongoing commitment to enhance our business controls,” and that LPL has “been working to remediate many of these issues through a deliberate and sequenced approach, and we expect to remediate the items identified in the agreement as required by its terms.”

The statement added: “While we are pleased to put the specific issues related to this agreement behind us, we understand that sustaining strong risk management and compliance requires constant focus and attention. LPL has made a long-term commitment to rebuilding its risk management and compliance infrastructure, and this resolution is a significant step in that process. The substantial and ongoing investments made by LPL in our legal, risk management, compliance and other control functions reflect that this is a top priority for the company.”