NEW YORK, March 24 LPL Financial, the fourth-largest U.S. broker-dealer by number of salespersons, was fined $950,000 by the securities industry's self-regulatory group for failing to supervise the way brokers sold nontraditional investments.
The fine is the latest in a series of actions against LPL and other so-called independent broker-dealers. These firms provide products, marketing and regulatory services to independent brokers who are not full-time employees. Many of the fines stem from failed attempts to supervise the brokers' sales activities.
The Financial Industry Regulatory Authority (FINRA) said LPL in the latest instant failed to have in place procedures for ensuring that customers' portfolios were not too concentrated in so-called alternative investments. The investments include non-traded real estate investment trusts, oil and gas partnerships, business development companies, hedge funds, futures funds and other investments that are not liquid, meaning they cannot easily be sold.
FINRA found that from Jan. 1, 2008, to July 1, 2012, LPL failed to adequately supervise the sales of alternative investments that violated concentration limits. At first, LPL used a manual process to review whether an investment complied with suitability requirements, relying on information that was at times outdated and inaccurate. The firm later implemented an automated system for review, but that database contained flawed programming and was not updated in a timely manner to accurately reflect suitability standards.
LPL spokeswoman Betsy Weinberger said the firm cooperated fully with the investigation and "is pleased to have resolved this matter."
She said the complaint centered on a broker who sold real estate investment trusts (REITs), and who was terminated as soon as LPL became aware of his practices. She also said that LPL has enhanced its supervisory policies and procedures. The firm did not formally admit or deny the FINRA charges.
The brokerage firm, which has been subject in recent years to several fines from state regulators, also did not adequately train supervisors to analyze state suitability standards, FINRA said.
"LPL exposed customers to unacceptable risks by not having an adequate system in place that could accurately review whether a transaction complied with suitability requirements imposed by the states, the product issuers and the firm itself," FINRA's head of enforcement, Brad Bennett, said in a prepared statement.
"It failed to train its registered representatives to apply all the suitability guidelines appropriately."
In 2013, LPL paid a fine of $500,000 to the Massachusetts Securities Division and offered to return $2 million for similar violations involving the sale of nontraded REITS that were unsuitable for clients. LPL also recently changed oversight procedures so that compliance responsibilities for one-person offices are now assumed by the company's central office rather than by larger brokers. (Reporting by Jed Horowitz; editing by Matthew Lewis)