FINRA Fines LPL $6.5 Million for “Supervisory Deficiencies”
The Financial Industry Regulatory Authority has issued a $6.5 million fine against LPL Financial, the nation’s largest independent broker-dealer, for supervisory deficiencies.
The Financial Industry Regulatory Authority has issued a $6.5 million fine against LPL Financial, the nation’s largest independent broker-dealer, for failing to establish and maintain a supervisory system to achieve compliance with record retention, fingerprinting and screening, and supervision of consolidated reports.
FINRA said that LPL’s failure to supervise consolidated reports enabled one former broker, who was convicted of securities fraud, to create and disseminate reports containing false information.
According to a letter of acceptance, waiver and consent issued by FINRA, the former LPL broker, “exploited the firm’s supervisory deficiencies” with respect to its consolidated reports and stole at least $1 million of LPL customers’ money as part of a multi-year Ponzi scheme.
Although not specifically named in the letter, James T. Booth pled guilty to one count of securities fraud in October 2019 and was barred by the SEC the following month. The longtime broker was briefly registered with LPL from February 2018 through May 2019 before being fired for misappropriating “multiple clients’ funds for his personal and business use,” according to his BrokerCheck profile. The broker-dealer has since paid restitution to “numerous” LPL customers whose money was stolen by Booth.
FINRA claims that LPL was not aware of certain tools that its approved third-party vendors provided to its registered representatives to create and disseminate consolidated reports.
In particular, LPL’s vendors created “non-finalized” consolidated reports, which, although intended for internal use, could be sent to customers. The vendors did not send the reports to LPL, and the firm therefore did not review them. FINRA stated that vendors also allowed representatives and customers to directly access reports on the vendors’ websites, which were not received or reviewed by LPL first.
FINRA also claims that LPL also did not review assets that were manually entered by representatives on consolidated reports if a broker categorized them as “non-securities related,” even when the assets were evidently securities related.
In addition, FINRA alleged that from January 2014 to September 2019, LPL failed to establish and maintain a supervisory system to achieve compliance with certain of its record retention obligations.
FINRA claims that the firm’s failure affected at least 87 million records and led to the permanent deletion of more than 1.5 million customer communications maintained by a third-party data vendor. These included mutual fund switch letters, 36-month letters, and wire transfer confirmations that were required to be preserved for at least three years.
In August 2017, after FINRA requested certain customer letters that LPL could not locate, LPL contacted its vendor in an attempt to locate them. The vendor informed LPL that about 500,000 customer communications, including the letters, had been deleted because they were placed in a temporary storage location from which records were automatically deleted after one year.
FINRA claims that LPL did not take reasonable steps to verify that the vendor migrated the other documents remaining in the temporary storage location to an appropriate location. The vendor later discovered that the migration did not occur and that approximately one million additional LPL customer communications had been deleted.
LPL was also accused of failing to fingerprint and screen more than 7,000 non-registered associated persons for statutory disqualification based on criminal convictions. LPL identified this failure during a retrospective review and self-reported it to FINRA.
Most of these individuals were technology professionals located outside of the United States and were retained for project-specific activities relating to the firm’s securities business.
Separately, in January 2017, LPL submitted fingerprints to FINRA for processing and received a notice stating that the individual had been convicted of a misdemeanor for possession of a forged instrument and was therefore subject to disqualification. However, FINRA claims that LPL permitted this individual to remain associated with the firm until September 2019.
In addition to a censure and fine, LPL must retain, at its own expense, a third-party consultant to conduct a comprehensive compliance review in the areas identified in the AWC letter. LPL signed the letter without admitting or denying the allegations.
LPL has more than 21,500 registered representatives operating out of nearly 13,000 branch offices.
