"Widespread Supervisory Failures" Related to Complex Products Sales
May 06, 2015 09:59 AM Eastern Daylight Time WASHINGTON–(BUSINESS WIRE)–The Financial Industry Regulatory Authority (FINRA) announced today that it has censured LPL Financial LLC and fined it $10 million for broad supervisory failures in a number of key areas, including the sales of non-traditional exchange-traded funds (ETFs), certain variable annuity contracts, non-traded 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.
In addition to the fine, FINRA ordered LPL to pay approximately $1.7 million in restitution to certain customers who purchased non-traditional ETFs. The firm may pay additional compensation to ETF purchasers pending a review of its ETF systems and procedures. Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, “LPL’s supervisory breakdowns resulted from a sustained failure to devote sufficient resources to compliance programs integral to numerous aspects of its business. With today’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.”
ETFs, Variable Annuities and Non-Traded REITS
FINRA found that, at various times spanning multiple years, LPL failed to supervise sales of certain complex structured products, including ETFs, variable annuities and non-traded REITs. With regard to non-traditional 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.
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. Additionally, LPL failed to supervise non-traded REITs by, among other things, failing to identify accounts eligible for volume sales charge discounts.
FINRA also found that LPL’s systems to review trading activity in customer accounts were plagued by multiple deficiencies. For example, 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. In addition, due to coding defects that remained undetected for nearly six weeks, LPL’s anti-money laundering surveillance system failed to generate alerts for excessive ATM withdrawals and ATM withdrawals in foreign jurisdictions.
FINRA also found that LPL failed to report certain trades to FINRA and the MSRB, and failed to ensure it provided complete and accurate information to FINRA and to federal and state regulators concerning certain variable annuity transactions. FINRA further found that LPL failed to reasonably supervise its advertising and other communications, including its registered representatives’ use of consolidated reports.
LPL did not monitor the creation or use of consolidated reports, and failed to ensure that these reports reflected complete and accurate information. In settling this matter, LPL neither admitted nor denied the charges, but consented to the entry of FINRA’s findings. Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA’s BrokerCheck. FINRA makes BrokerCheck available at no charge.
In 2014, members of the public used this service to conduct 18.9 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999. Investors may find copies of this disciplinary action as well as other disciplinary documents in FINRA’s Disciplinary Actions Online database.
FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business – from registering and educating all industry participants to examining securities firms, writing rules, enforcing those rules and the federal securities laws, and informing and educating the investing public.
In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers the largest dispute resolution forum for investors and firms. For more information, please visit www.finra.org.