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Marcato Capital Takes 6.3% Stake in LPL

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Marcato Capital Management has taken a 6.3% stake in LPL Financial, according to regulatory filings.

As of Tuesday, the San Francisco-based hedge fund, which is run by Mick McGuire and known for its activist approach, owns some 6 million shares.

Marcato, which Reuters has called “one of the country’s hottest hedge funds,” thinks the independent brokerage’s shares are undervalued, according to a report in The Wall Street Journal.

In the filing with the Securities and Exchange Commission, Marcato said it may reach out to LPL regarding the independent broker-dealer’s corporate growth strategies.

“LPL Financial maintains an active and ongoing dialogue with its investors and values their input as we work toward the common goal of driving stockholder value,” the company said in a statement.

LPL’s top institutional holders, as of June 30, were SPO Advisory Corp. (9.2%), T. Rowe Price Associates (8.4%); Janus Capital Management (6.7%), Vanguard Group (5.4%), Invesco (4.6%) and Morgan Stanley (3.9%), according to Yahoo Finance.

The IBD’s shares traded up about 1.5% Tuesday after the news broke to about $41 per share.

Under Pressure 

Last week, LPL named Emily Gordy executive vice president and deputy general counsel. Gordy joined LPL from Shulman, Rogers, Gandel, Pordy & Ecker. Prior to this role, she spent 27 years as a regulator for the Financial Industry Regulatory Authority. In addition, she worked for its predecessor, the National Association of Securities Dealers, and for the SEC.

The IBD also says it set up a Regulatory Counseling group that will provide all business units with advice and counsel about ”regulatory, compliance and risk matters.” The group includes an internal investigations unit and is led by James S. Shorris, executive vice president, deputy general counsel and a former FINRA enforcement chief who joined LPL in 2011.

Compliance staff at the IBD have been busy as of late.

Earlier this year, FINRA levied a $11.7 million charge against the IBD for supervisory failures in the sale of complex products and ordered that $6.3 million be paid in restitution for failing to waive mutual fund upfront charges to certain retirement plans and charities.

In 2014, LPL spent $36 million on regulatory charges. Recently, it has added nearly 400 employees to its compliance, legal and control staff. As a result, the IBD “tracked several areas of exposure generally involving the thoroughness or completeness of our processes and systems of supervision and surveillance of several complex products,” according to Chairman & CEO Mark Casady, who discussed compliance matters with equity analysts after the firm released its second-quarter earnings in early August.

Casady added that the firm’s regulatory charges “are unpredictable quarter to quarter,” but that it believes it has incurred “the majority of the cost of these issues and have the compliance infrastructure to mitigate future exceptions, which should lead to meaningfully lower annual regulatory charges beginning in 2016.”

As for the expected fiduciary standard being hammered out by the Department of Labor, LPL should have the “scale and flexibility” to adjust. Its assessment is that the current proposal’s restriction on alternative investment sales, for instance, would have an impact “of 2% or less” on its pretax profit, Casady explains.

The company adds that it expects its 2015 regulatory outlay to be lower than in 2014 and that its 2016 expenses in this area should “be meaningfully lower than the elevated levels seen in 2014 and 2015,” according to interim CFO Tom Lux, who also spoke with analysts last month.

Tech Hires

About one month ago, LPL hired Anthony Perkins, who had been Wells Fargo Advisors’ chief technology officer; Perkins is now the IBD’s head of technology product development. Perkins will report to Chief Information Officer Victor Fetter.

In June, LPL nabbed former E-Trade Chief Financial Officer Matthew Audette to be its new CFO, starting Sept. 28. Audette is set to fill the role previously held by current LPL President Dan Arnold; acting CFO Tom Lux is in charge of the IBD’s finances until Audette comes on board.

In early March, Arnold moved out of the CFO role when then-President Robert Moore announced plans to become CEO of Legal & General Investment Management America. And in May, the IBD added David Wright to serve as its chief technology officer. (Prior to joining LPL, Wright was interim CIO at McGraw-Hill for seven months.)