FINRA levied more than $6 million in fines and investor reimbursement against
That total includes a $5.5 million fine and more than $650,000 in investor reimbursement charges. In agreeing to the penalty amounts on Dec. 27, LPL neither admitted to nor denied the allegations.
According to FINRA, LPL failed to ensure that its representatives were properly logging their business dealings, resulting in 830,000 transactions not being adequately recorded between January 2012 and August 2019. The firm also stood accused of failing to collect clients' profile information — data needed to gauge whether any possible investment recommendation is actually suitable — for 2 million trades.
"If the ultimate goal is the protection of investors, I tend to go to the top, and the top is the regulators," Schulz said. "And when I see this much wrongdoing for this many years before someone says anything, then I'm very critical of FINRA."
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A FINRA spokesman declined to comment beyond
"But the penalty is still large compared with the $10,000, $20,000 or $50,000 fines you often see handed out," Berkson said. "So clearly, FINRA did take this seriously."
LPL — the largest independent broker-dealer in the United States — has more than 22,000 advisors, most of them contract employees. In October,
Berkson said he would have liked to see LPL lay out exactly what steps it will take to prevent the alleged violations from happening again. Many of the deficiencies cited by FINRA were of the type that should have been fairly easy to detect using electronic surveillance systems.
"Where you have these sorts of wholesale problems with their entire system, it really calls into question their supervisory structure," Berkson said.
Berkson noted that LPL appears to have alerted regulators to some of the breaches on its own and then cooperated in the resulting investigation. That most likely helped to hold down the penalty amount.
According to FINRA, LPL identified 74 transactions in which mutual fund shares were bought on the behalf of clients whose investing goals — because of the lack of customer profiles — were inadequately understood. That resulted in $546,000 in possible excessive sales charges, FINRA said.
FINRA also alleged that LPL, from February 2016 to June 2020, sent clients 11,300 letters that failed to accurately state the charges they would be incurring for switching from one security to another. FINRA cited 50 transactions involving switches between investment trusts and mutual funds that caused customers to pay $31,000 in sales charges.
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FINRA also said that LPL violated the care obligation under Regulation Best Interest — the bedrock conduct standard for the brokerage industry — by failing to have proper supervisory systems in place from May 2017 to November 2022.
LPL was under scrutiny specifically for allowing some clients' money to be concentrated in so-called business development companies designed to give investors access to private equity and other alternatives. An electronic supervision system failed to alert LPL that some clients with a low or moderate tolerance for risk had more than half of their household assets in these vehicles.
Michael Edmiston, another former PIABA president and a securities lawyer at Jonathan W. Evans & Associates in Studio City, California, said the case is yet another warning notice suggesting that regulators are getting serious about enforcing Reg BI.
"Going forward, it does show that FINRA is applying Reg BI standards to recent conduct and expecting firms to do better and comply with the basic strictures of Reg BI," Edmiston said. "This is really meat and potatoes stuff."
