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Regulation and Compliance > State Regulation

States Fine LPL $26M Over Unregistered Securities Sales

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LPL Financial has reached a deal with state securities regulators that requires the independent broker-dealer to repurchase some securities from investors with interest and pay civil fines of up to $26 million, if all 52 U.S. states and territories participate.

The North American Securities Administrators Association, which announced the news, says the settlement is tied to securities sold by LPL since October 2006. It stems from investigations in Alabama and Massachusetts regarding the IBD’s “failure to establish and maintain reasonable policies and procedures to prevent the sale of unregistered, nonexempt [equity and fixed income] securities by LPL to its customers,” according to NASAA.

“This investigation is representative of the aggressive and coordinated enforcement actions of state securities regulators and demonstrates the important investor protection role states serve in safeguarding investors nationwide,” said Joseph P. Borg, NASAA president and director of the Alabama Securities Commission, in a statement.

The group set up a task force with Massachusetts and Alabama in July 2017 to review LPL’s sale of unregistered, nonexempt securities; the IBD “fully cooperated” with the task force, Borg says.

“We take our compliance and risk management obligations seriously and will continue to dedicate resources to this important work moving forward,” LPL said in a statement. “We believe these resources, combined with additional expertise we’ve hired in the field of Blue Sky compliance, position us well with respect to this issue in the future.”

Blue Sky regulations are those set by states to safeguard investors against securities fraud.

The NASAA investigation focused on the IBD’s retention, use and cancellation of third-party services that have been “integral to LPL’s compliance with state securities registration requirements,” according to a press release.

State securities regulators also reviewed other legacy deficiencies within the IBD’s compliance structure, such as controls, monitoring and reporting tools, as well as escalation protocols tied to its response to significant compliance issues.

State securities regulators concluded that LPL offered and sold unregistered, nonexempt securities and failed to reasonably supervise the flow of information to ensure full and proper compliance with state securities registration requirements.

“The action today represents the states at their best — working together on an extremely important investor protection matter,” explained Commonwealth Secretary William F. Galvin, Massachusetts’ top securities regulator, in a statement. “Because of the states’ combined efforts, thousands of investors will benefit and be given the right to have their money returned plus interest.”

According to Borg, while regulators did not find evidence “of willful, reckless or fraudulent conduct by LPL, they did find that the firm failed to maintain adequate systems to reasonably supervise agents, staff and employees to prevent the sale of unregistered, nonexempt securities.”

State investigators also says that the IBD did not maintain books and records necessary “to ensure full and proper compliance with state securities registration requirements; and failed to conduct appropriate and necessary due diligence regarding the retention, use and subsequent cancellation of certain third-party services critical for compliance with state securities registration requirements.”

Furthermore, they point out, LPL acted negligently in its cancellation of third-party services “critical for compliance with state securities registration requirements; failed to supervise agents, staff and employees in the performance of duties with respect to systems operation, process, and checks and balances to ensure compliance with state securities registration statutes, rules and regulations; and failed to invest sufficient and appropriate resources in personnel, expertise, systems and operations to adequately comply with state securities registration statutes, rules and regulations.”

As part of the settlement, the IBD agreed to a full review “of the integration of new securities products to assess this firm’s ability to comply with all state securities registration requirements, and all operations and procedures in connection with state registration requirements, that apply to the offer and sale of that product.”

LPL also will conduct a similar review of its vendor-service protocols “to ensure processes are in place for identification and management of critical services” used in complying with state securities laws.

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