FINRA imposes $6.5M fine on LPL Financial
LPL Financial LLC has agreed to a $6.5 million fine as a part of a settlement with the United States Financial Industry Regulatory Authority (FINRA).
LPL failed to establish and maintain a supervisory system, including written procedures, reasonably designed to achieve compliance with three regulatory obligations: record retention, fingerprinting and screening of associated persons, and supervision of consolidated reports.
Federal securities laws and regulations and FINRA rules require broker-dealers to maintain certain broker-dealer and customer records in a form and manner designed to prevent their loss, alteration, or deletion. Protecting the integrity of these required records is an essential obligation for broker-dealers because review of such records is the primary means by which regulators protect investors and examine for misconduct.
From January 2014 to September 2019, LPL failed to establish and maintain a supervisory system, including written procedures, reasonably designed to achieve compliance with certain of its record retention obligations, in violation of NASD Rule 3010 and FINRA Rules 3110 and 2010. As a result, among other things, the firm failed to retain electronic records in the required format, preserve certain electronic records, and notify FINRA prior to employing electronic storage media. This was in violation of Exchange Act § 17(a), Exchange Act Rule 17a-4 and FINRA Rules 4511 and 2010.
The firm’s failure affected at least 87 million records and led to the permanent deletion of over 1.5 million customer communications maintained by a third-party data vendor.
Further, LPL failed to send account notices that are required to be sent to customers at 36-month intervals for each account in which a suitability determination had been made (36-Month Letters) to over one million customers in violation of Exchange Act § 17(a), Exchange Act Rule 17a-3, and FINRA Rules 4511 and 2010.
Federal securities laws also require that FINRA member firms fingerprint associated persons prior to or upon association with a broker-dealer. Member firms review the fingerprint results as part of their background check to determine, among other things, whether a prospective associated person has previously engaged in misconduct that subjects that person to a statutory disqualification.
Exchange Act § 3(a)(39) stipulates that certain criminal and regulatory events will subject a person to a statutory disqualification. Among other things, the fingerprint results provide information about a prospective associated person’s criminal background.
From January 2014 through the present, LPL failed to fingerprint more than 7,000 non-registered associated persons and thus failed to screen these individuals for statutory disqualification based on criminal convictions. This problem arose from the firm’s failure to maintain a reasonable supervisory system and procedures to identify and properly screen all individuals who became associated with the firm in a non-registered capacity. The firm self-reported this failure to FINRA and commenced a remedial review.
Separately, from January 2017 to September 2019, LPL permitted a non-registered associated person, who was subject to statutory disqualification, to remain associated with the firm. As a result of the foregoing, LPL violated Article III, Section 3(b),of FINRA’s By-Laws, Exchange Act§17 (a)and (f), Exchange Act Rules 17a-3 and 17f-2, NASD Rule 3010, and FINRA Rules 3110, 4511, and 2010.
Finally, from May 2015 to the present, LPL failed to establish and maintain a supervisory system reasonably designed to supervise certain consolidated reports. LPL was not aware of, and therefore failed to reasonably supervise, certain tools that its approved third-party vendors provided to the firm’s registered representatives to create and disseminate consolidated reports. In particular, the firm’s vendors created “non-finalized” consolidated reports, which, although intended for internal use, could be sent to customers. Nonetheless, the vendors did not send such reports to LPL and the firm therefore did not review them.
The firm’s vendors also allowed representatives and customers to directly access consolidated reports on the vendors’ websites, and the firm did not receive or review consolidated reports that its representatives disseminated in this manner. The firm also failed to review assets that were manually entered by representatives on consolidated reports when the representatives categorized them as “non-securities related,” even when the manually entered assets were evidently securities-related.
A former registered representative of the firm exploited these supervisory deficiencies in perpetrating a Ponzi scheme through which he converted at least $1,000,000 of LPL customers’ money. As a result, LPL violated Exchange Act §17(a), Exchange Act Rule 17a-4, and FINRA Rules 3110, 4511, and 2010.
On top of the $6.5 million fine, the firm has agreed to a censure.