The Financial Industry Regulatory Authority (FINRA) fined LPL Financial $6.5 million following yet another Acceptance, Waiver, and Consent agreement (AWC) with the firm. AWCs allow advisors to consent to FINRA’s findings without admitting or denying the findings. In their latest AWC, LPL Financial consented to the findings that they failed to supervise and maintain appropriate records. These failures allegedly exposed their clients to fraud, as well as possible misinformation regarding investor assets.
Failure to Reasonably Supervise Consolidated Reports
Consolidated reports contain essential information about customers, including their assets outside of the firm. FINRA alleged several failings when it came to LPL Financial’s supervision of these reports, including that they did not reasonably review drafts of the reports before they were sent to customers. LPL Financial also failed to review manually entered assets, which allegedly made their customers vulnerable to a Ponzi scheme.
LPL Financial Allegedly Failed to Protect Clients from a Ponzi Scheme
LPL Financial allegedly failed to review assets that were manually entered and categorized as “non-securities related.” According to FINRA, this oversight allowed a former registered representative to send reports to customers that contained fictitious assets. This allegedly made it possible for that same representative to start a Ponzi scheme that allowed him to misappropriate at least $1,000,000.
Fingerprinting Issues and Association of a Non-Registered Person
FINRA requires that firms fingerprint associated persons (both registered and non-registered) for background checks. These background checks identify representatives who have engaged in misconduct that would disqualify them from association with a firm. FINRA does not allow firms to associate with a person who has been previously barred by FINRA or convicted of a felony within the past 10 years.
According to LPL Financial’s own estimation, 5,000 non-registered associated slipped through the cracks. Today, they have no way to ascertain if these individuals engaged in any disqualifying conduct.
Association of a Disqualified Person
According to FINRA, even when LPL Financial learned that an associated person had a disqualifying misdemeanor, they allowed them to remain associated with the firm. Allegedly, FINRA issued a notice to LPL Financial stating that the associated person had a misdemeanor for the possession of a forged instrument. FINRA issued the notice in 2017, but the AWC alleges the individual remained associated with LPL Financial until 2019.
LPL Financial Accidentally Deleted 1.5 Million Records
The AWC states that from January 2014 to September 2019, LPL Financial failed to establish and maintain a supervisory system of its records. According to the AWC, this violation led to the deletion of 1.5 million customer records, which would include communications between customers and brokers, such as mutual fund switch letters. Records like these are essential, as they allow regulators and securities attorneys to evaluate whether representatives have fulfilled their obligations to their customers.
A History of Compliance Issues
LPL Financial’s previous AWCs reveal a pattern of similar compliance issues. In December of 2016, LPL Financial entered into an AWC agreement that consented to the findings that from December 2010 to November 2015, the firm failed to maintain over 18.3 million electronic internal compliance and administrative alerts in a non-erasable and non-rewritable format, in compliance with SEC requirements.
This is just one example from their long history of regulatory disclosures. LPL Financial’s detailed BrokerCheck report reveals 239 disclosures, many of which include regulatory fines.
What’s Next for LPL Financial Investors?
According to FINRA, LPL Financial has hired third parties to review their supervisory procedures and recordkeeping. This firm is the largest broker-dealer in the U.S., and they have ample resources to ensure that they meet the compliance requirements of securities industry regulators. When they fail to supervise and maintain reasonable records, they expose their clients to substantial risk.