LPL Financial must pay a fine of $2.75 million to settle a FINRA investigation alleging shoddy reporting of client complaints and failures in its anti-money laundering program.
The No. 1 independent-broker dealer did not report 31 client complaints on advisors’ Forms U4 and U5, and the firm did not add amendments to advisors’ records in a timely manner to disclose 149 other complaints and reportable events,
In addition, LPL did not investigate unauthorized attempts to access its systems that should have also resulted in the filing of more than 400 suspicious activity reports, the regulator says. FINRA says it conducted three separate investigations of LPL spanning from the start of 2013 to the end of 2017.
The case “highlights FINRA’s persistent focus on ensuring that firms file with the government and with FINRA information critical to the protection of investors and the public,” Susan Schroeder, an executive vice president in FINRA’s enforcement unit, said in a statement.
“Forms U4 and U5 in particular,” she continued, “serve as an essential source of information to the investing public in deciding whether to entrust their assets with a broker.”
LPL, which didn’t admit or deny the allegations, also agreed to review 696 complaints filed by clients over the nearly five-year span and make changes to its policy and procedures. LPL also
“We’ve made significant investments to enhance our AML program at LPL,” Michelle Oroschakoff, LPL’s chief legal officer, said in a statement. “We’re pleased that FINRA noted our ‘extraordinary cooperation’ in identifying, self-reporting, investigating and remediating these issues thoroughly and promptly.”
LPL first came to FINRA’s attention because of a client complaint alleging that a breach of an email account led to $9,500 in losses, according to the letter of acceptance, waiver and consent. When questioned about the incident, LPL admitted it had not filed a suspicious activity report and said it had found widespread gaps in its investigations into cyber events.
Compliance staff at LPL relied on a “fraud case chart” that outlined inaccurate guidance for when its employees needed to investigate and report on third parties attempting to electronically gain access to a customers’ email or brokerage accounts, according to FINRA.
The chart wrongly instructed staff not to investigate cyber-related events if they did not result in a financial loss or if the attempted intrusion was unsuccessful, investigators say. FINRA requires firms to file SARs for cyber-related events regardless of whether there is a breach.
The firm set a threshold in losses resulting in an investigation at $25,000, instead of the required $5,000 threshold, and it also failed to set up reasonable procedures for reviewing AML referrals, according to FINRA. LPL’s repository gets about 16,000 to 20,000 such items per year.
In another investigation, FINRA was examining the complaints of a client alleging an LPL advisor had caused losses of more than $200,000 by misrepresenting certain investments, the document shows. Investigators say LPL had not reported it on the advisor’s Form U4.
Asked about the disparity, the firm responded that the client’s case didn’t “contain a claim for compensatory damages” because the client’s letter “does not request the return of those funds or state any other claim for damages,” according to the settlement.
In its decisions about amendments to advisors’ Forms U4 and U5, LPL “incorrectly construed” and “too narrowly interpreted” the threshold of $5,000 for disclosing such client claims, FINRA says. The firm didn’t disclose more than 30 such complaints, according to the regulator.
The missing complaints include one client alleging she lost $17,000 left by her late husband for her due to an advisors’ misleading statements and unauthorized trades, the document shows. Another one expressly stated that they “deserve compensation” for losses of $11,000.
A third investigation into the firm’s U4 and U5 amendments showed that LPL had more late filings than the industry average, according to investigators. The nearly 150 examples involved client complaints, judgments, bankruptcies, terminations and regulatory and criminal actions.
