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LPL Financial Sanctioned for Supervisory Failures

According to the Financial Industry Regulatory Authority (“FINRA”), it has entered into a Letter of Acceptance, Waiver and Consent (“AWC”) with brokerage firm LPL Financial LLC for supervisory failures in a number of areas.  The AWC reflects that LPL neither admitted nor denied FINRA’s charges, but consented to the entry of FINRA’s findings.  According to the AWC, LPL will pay a fine of $10 million and approximately $1.7 million in restitution to the effected purchasers of non-traditional ETFs.

According to the AWC, from 2007 to 2013, the number of LPL’s registered representatives increased from around 8,300 to 17,500.  In that same time frame, LPL’s revenue nearly doubled from $2.28 billion to $4.05 billion.  FINRA claimed that LPL didn’t dedicate sufficient resources to meet its increased supervisory obligations resulting from this growth.

FINRA asserted that LPL failed to have adequate supervisory systems in place with respect to the sales of complex, synthetic exchange traded funds, such as leveraged, inverse, and inverse-leveraged ETFs (“non-traditional ETFs”); variable annuity contracts; non-traded real estate investment trusts (“REITs”); and Class C mutual fund shares.  In addition, FINRA found that LPL failed to send more than 14 million trade confirmations to its customers.

Some of the specific findings by FINRA:

Non-traditional ETFs:  LPL failed to monitor the length of time non-traditional ETFs were held in its customers’ accounts.  Most non-traditional ETFs are designed to meet their stated objections on a daily basis and are typically inappropriate for a buy-and-hold investment strategy.   FINRA’s review found that some LPL customers held these securities for more than a year.  LPL did not have a system in place to monitor compliance with its written procedures that required brokers to monitor non-traditional ETFs held in customer accounts on a daily basis.  In addition, the firm also failed to monitor compliance with its established allocation limits concerning the maximum allowable allocation of non-traditional ETFs per client which ranged from 0 percent (accounts with an investment objective of “income”) to 15 percent (accounts with investment objectives of “growth” or “trading”).   The firm also did not monitor compliance with its requirement that brokers complete an ETF training course before engaging in non-traditional ETF transactions.

Variable Annuities:     LPL brokers were required to disclose whether customers would incur fees or sacrifice benefits when switching annuity contracts.  According to FINRA, LPL failed to identify that some of its brokers did not disclosure that customers lost death benefits on surrendered annuities or did not disclose to customers the surrender fees they would incur for the annuity switch.

Non-traded REITs:     LPL failed to have adequate procedures to identify accounts that would be eligible for volume price discounts.

Class C Shares:           LPL’s thresholds for determining whether Class C shares were appropriate were set too high to be effective.