The Financial Industry Regulatory Authority has censured and fined LPL Financial, the nation’s largest independent broker-dealer, for allegedly failing to accurately calculate its customer reserve requirement and failing to maintain a sufficient customer reserve, resulting in two hindsight deficiencies, totaling approximately $162 million. LPL agreed to pay $300,000 to settle the charges.
According to FINRA, the Exchange Act’s “customer protection rule” requires broker-dealers to maintain a special reserve bank account for its customers to protect customer assets from being improperly used and ensure the prompt return of customer assets in the event of a broker-dealer’s insolvency.
In general, broker-dealers calculate what it owes customers (credits) and compares this to what customers owe (debits). If credits exceed debits, the broker-dealer must deposit the difference in the reserve account. A hindsight deficiency occurs when a broker-dealer discovers that it previously failed to make a sufficient deposit in its reserve account.
Customer checks received by a broker-dealer for the account of the customer must be included in the firm’s computation of reserve requirements on the day that they are received, even if they are not deposited on that date.
FINRA said that during the relevant period, LPL’s customer reserve calculations excluded customer checks that the firm had received but not yet processed for deposit. As a result, the firm failed to make sufficient deposits in its customer reserve account on two dates during March 2020, causing two hindsight deficiencies that totaled approximately $162 million.
As a result of the alleged violations, LPL maintained inaccurate books and records and filed at least 17 Financial and Operational Combined Uniform Single (FOCUS) reports that inaccurately reported its customer reserve, said FINRA in a letter of acceptance, waiver, and consent.
In addition to the censure and fine, LPL must certify in writing within 180 days that it has implemented supervisory systems and procedures reasonably designed to achieve compliance with the customer reserve requirements.
LPL signed the AWC letter without admitting or denying FINRA’s allegations.