May 20, 2013 / 10:02 PM / 4 years ago

Broker-dealer LPL overhauling compliance practices after fines

5 Min Read

* US brokerage firm hit with sales and marketing violations

* Firm to phase out 1-person oversight of far-flung offices

* Firm plans to hire many more compliance staffers

By Jed Horowitz, Ashley Lau and Suzanne Barlyn

NEW YORK, May 20 (Reuters) - LPL Financial Holdings Inc , a fast-growing broker-dealer that offers services to more than 13,000 independent stockbrokers, is overhauling its compliance procedures following a flurry of regulatory complaints about sales abuses.

LPL, which operates on very thin profit margins, is phasing in a program to centralize compliance in its regional and home offices and spending heavily to hire compliance staff and improve its systems, President Robert Moore said in an interview.

"Mistakes happen and we're not going to be exempted from that, but the attitude around the way we identify, ultimately mitigate and address them are very fundamental to our future and ability to credibly lead," he said. "It comes at a cost that we have to find a way to absorb."

LPL, the fourth biggest U.S. brokerage firm, has added 137 people to its compliance staff over the last two years and will do more going forward. Moore expects most of the changes to be completed this year.

A major part of the plan is to transfer responsibility for sales, marketing and all compliance issues in small offices to people whose sole responsibility is compliance, Moore said. Like many independent brokerage firms, LPL has often delegated supervisory responsibility over brokers in neighboring offices to a single senior broker in another office who is managing his or her own business solo.

Separately, LPL has said in regulatory filings that it anticipates announcing a settlement soon with the Financial Industry Regulatory Authority, the financial industry's self-regulator, over issues related to e-mail retention.

LPL, based in San Diego and Boston, has about 400 compliance staffers, but the number should grow well beyond that before yearend, Moore said.

The new rigor follows an article in The New York Times on March 21 that highlighted compliance issues at LPL. Federal regulators reprimanded LPL more frequently than any of its large competitors for failing to supervise its brokers on proper sales practices, and state regulators have imposed a flurry of fines for its failure to supervise, according to the article.

Since then, Moore has been on a goodwill campaign with regulators and the press to talk about the firm's newly robust plans for oversight.

"It's too soon to say if it's enough, but they are taking a step in the right direction and hopefully it's adequate," Lynne Egan, deputy securities commissioner for the state of Montana, said in an interview.

Montana has imposed more than $160,000 of fines against LPL and required it to return about $1.2 million to clients since 2009.

Moore and James Shorris, head of regulatory and compliance policy for LPL, visited Egan shortly after publication of the Times article. Shorris, a former head of enforcement at the Financial Industry Regulatory Authority, was hired by LPL in September 2011.

Moore told Reuters that LPL's growing compliance costs for its far-flung sales staff, many of whom operate out of one- and two-person offices, are heavy but "far more of a burden to our competition than it has been for us."

Independent brokerage firms such as LPL are highly dependent on expense control because they pay brokers a higher percentage of the fees and commissions they produce than rivals such as Morgan Stanley, Merrill Lynch and regional firms pay to brokers who are full-time employees. Brokers who contract with independent firms, in turn, pay for much more of their overhead.

The compliance problem for independent firms such as LPL is exacerbated by having small offices, particularly in thinly populated states where a single person cannot keep watch. "We are evolving our model to have more localized oversight," Moore told Reuters.

"It makes us much more comfortable to have a branch manager 30 miles away registered to supervise local brokers than an individual who almost never sees them because he's managing his own business," said the head of an independent broker that competes with LPL and spoke on condition of anonymity. "If a broker drives by in a Lamborghini one day we wouldn't know about it, but hopefully someone who visits them regularly would ask some questions."

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