LPL Financial LLC must pay a total of $9 million for significant email system failures and making misstatements to the Financial Industry Regulatory Authority, Wall Street's watchdog.
LPL, an affiliate of LPL Financial Holdings Inc, agreed to a fine of $7.5 million and will establish a $1.5 million fund to compensate brokerage customers potentially affected by email violations, the regulator said on Tuesday.
As part of the settlement, LPL neither admitted nor denied FINRA's charges.
"We recognize the importance of having effective policies, procedures and systems to review and retain emails, and we very much regret our lapse of oversight," LPL said in a prepared statement that noted it has "cooperated fully" with FINRA since reporting the email issue to the regulator in September 2011.
Securities industry rules require brokerages to store and review emails for a set period to ensure compliance with procedures and prevent potential wrongdoing.
FINRA accused LPL of failing to update its unwieldy and increasingly complex email systems despite being "well aware" of their inability to keep up with its rapid growth. From 2007 to 2013, the firm's email review and retention systems failed at least 35 times, FINRA said, leaving LPL unable to produce requested documents to regulators and perhaps to private litigants.
The problem was exacerbated at LPL because its brokers are not full-time employees, but instead contract with the firm for its brokerage and marketing services. Over four years, LPL failed to supervise 28 million emails sent and received by thousands of the independent contractors and erroneously told FINRA that it was not aware of the problem until June 2011, the regulator said.
LPL also said it is comprehensively redesigning its email system and related compliance procedures, hiring outside experts to validate its approach, and training employees to escalate compliance issues to supervisors when they become aware of problems.
Reuters reported on Monday that LPL also is overhauling its core procedures for monitoring its 13,000 advisers following a flurry of fines by regulators over sales abuses. They include LPL's $2.5 million settlement with Massachusetts' securities regulator for failing to supervise brokers who sold investments in non-traded real estate investment trusts, or REITs.
The brokerage firm, the fourth largest in the United States when ranked by the number of advisers, had previously disclosed it was in settlement talks with FINRA, and had recorded an expense for the expected fine in the first quarter.
LPL does not anticipate taking any further charges in this quarter for the email lapse, it said on Tuesday.
(Reporting by Suzanne Barlyn and Jed Horowitz; Editing by Gerald E. McCormick, Matthew Lewis and Jan Paschal)