LPL Dinged Up to $26 Million Over Sales of Unregistered Securities
May 2, 2018
By Diana Britton, WealthManagement.com
An investigation by state securities regulators found the independent broker/dealer failed to prevent the sale of certain equity and fixed income securities that may not have been properly registered in their domains.
LPL Financial has settled with the North American Securities Administrators Association (NASAA) over claims it lacked proper policies and procedures to prevent the sale of unregistered, non-exempt equity and fixed-income securities over the last 12 years. Alabama and Massachusetts state securities regulators led the investigation, which LPL’s cooperation, and the settlement could be more than $26 million if all jurisdictions participate.
LPL has agreed to pay $499,000 to 52 U.S. states and territories, including the District of Columbia, Puerto Rico and the U.S. Virgin Islands. California has not yet agreed to participate in the settlement.
The firm will also offer to repurchase the affected securities from LPL clients, at 3 percent interest per year. Investors may also choose to decline the firm’s offer and continue holding the security.
“The action today represents the states at their best—working together on an extremely important investor protection matter,” said William Galvin, Secretary of the Commonwealth of Massachusetts. “Because of the states’ combined efforts, thousands of investors will benefit and be given the right to have their money returned plus interest.”
The affected transactions represent a small part of LPL’s business, although the broker/dealer wouldn’t quantify it. Most of the firm’s investment offerings—publicly listed stocks, mutual funds, insurance and annuities—were not impacted.
The investigation was focused on possible violations of blue sky laws, state laws designed to protect investors against securities fraud.
“We take our compliance and risk management obligations seriously and will continue to dedicate resources to this important work moving forward,” said Jeff Mochal, LPL spokesman, 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. Our focus now is on offering remediation to investors who may have been affected.”
“State investigators also determined that LPL failed to 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 cancelation of certain third-party services critical for compliance with state securities registration requirements,” according to a statement.
LPL will take several steps to correct the problem, including working with a third-party reviewer to analyze historical transactions dating back to October 2006. The firm expects the process will take several years to complete. The firm has also invested more into its blue sky compliance program. It also agreed to a “top-to-bottom” review of the integration of new securities products, as well as a review of its vendor service protocols.
The settlement will not affect plans to invest in the firm’s technology, service and other capabilities.
The firm’s advisors have complained about declining service levels, among other problems. CEO Dan Arnold recently laid out a plan to the b/d’s home office staff for how to fix them.
“A $26 million fine is unusually large even by LPL standards, and it comes at a time where they’ve had somewhat of a reprieve from major litigation expenses,” said Jonathan Henschen, president of the recruiting firm Henschen & Associates in Marine on St. Croix, Minn. “This will be a hit to quarterly profits and continue their legacy of disparaging press.”
The firm announces its first quarter earnings tomorrow.
