RIA Compliance Blog
Earlier this month, the Financial Industry Regulatory Authority (“FINRA”) announced that it had fined LPL Financial (“LPL”) $10 million for lack of supervision in several areas of its operations, including sales of ETFs, variable annuities, REITs, and other complex products. In addition, FINRA found LPL failed to monitor trades and failed to report them to FINRA and failed to deliver more than $14 million in trade confirmations to customers. FINRA also ordered LPL to repay certain customers $1.7 million in restitution relating to the purchases of ETFs. Among FINRA’s findings were that the firm did not have a system that monitored how long customers were holding ETFs in their accounts, information that would be important in formulating advice as to whether the ETFs should have been purchased in the first place and how long the client should be recommended to hold the ETFs in their portfolios. Additionally, even though LPL had created policies limiting the concentration of ETFs in customer accounts, it failed to enforce the limits it had established and had not trained its registered representatives on the risks of those products.
With respect to variable annuities, FINRA found that in several instances, LPL had permitted said annuities to be sold without proper disclosure of surrender fees. Additionally, although LPL employed an automated surveillance system, that system failed to adequately review transactions commonly known as mutual fund “switches,” which involve a redemption of one mutual fund in order to purchase another.
FINRA also found that LPL used a trading surveillance system that failed to generate “red flag alerts” or exception reports for certain customer trading activity that FINRA concluded involved a high degree of risk. This activity includes active trading (churning), potential employee front-running, and penny stock transactions. Additionally, LPL had over 67,000 customer accounts in which it failed to deliver trade confirmations, resulting in over 14 million confirmations not being delivered. Finally, FINRA found that LPL failed to supervise its representatives’ advertising and other communications, particularly the use of reports that attempted to consolidate and report all clients’ holdings, both inside and outside of LPL. LPL had no policy or process in place to monitor, disapprove or approve consolidated reports or to ensure that any report at that time of that sort was accurate.
Parker MacIntyre provides legal and compliance services to investment advisers, broker dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our website for more information.