LPL Financial hit with $2M fine, ordered to pay $820K in restitution

Settlement charges, higher expenses dampen 2Q financials

Jul 30, 2014 @ 8:42 am

By Bruce Kelly

LPL Financial last month was hit with a $2 million fine, and ordered to pay $820,000 in restitution, for failing to maintain adequate books and records documenting variable annuity exchanges, known as 1035 exchanges, according to the firm's profile on BrokerCheck.

The previously unreported settlement with the Illinois Securities Department contributed to flat second quarter earnings at LPL Financial Holdings Inc., leading the firm's CEO, Mark Casady to tell analysts on a conference call Wednesday morning that “We are not happy with these results.”

According to the BrokerCheck report, LPL Financial “failed to enforce its supervisory system and procedures in connection with the documentation of certain salespersons' variable annuity exchange activities,” according to the BrokerCheck report.

“LPL is pleased to have settled this matter following inquiries in which we cooperated fully with the State of Illinois,” said company spokeswoman Betsy Weinberger in an email.

“With regard to the accuracy of surrender charges incurred in connection with variable annuity exchange transactions, the company is instituting enhanced procedures with a view to ensuring that these charges are accurately reflected in the firm's books and records as well as in any disclosures given to clients, and that advisers are adequately documenting the basis for their variable annuity recommendations,” Ms. Weinberger wrote.

In its quarterly earnings report Wednesday morning, LPL reported that general and administrative expenses for the quarter ended June 30 increased 24% to $106.8 million from $84.5 million in the year-ago quarter.

The increase in general and administrative expense was primarily related to the resolution of regulatory issues, the company said in a statement.

Earnings per share were also flat year over year, at 42 cents.

For the past year and a half, LPL has been dogged by state regulators examining sales of investment products, including nontraded real estate investment trusts. In February 2013, LPL Financial reached a settlement with the Commonwealth of Massachusetts to pay at least $2 million in restitution and $500,000 in fines over the sale of nontraded REITs.

Last year, the Financial Industry Regulatory Authority Inc. fined LPL Financial $7.5 million for 35 separate significant e-mail system failures.

LPL also was ordered to create a $1.5 million fund to compensate brokerage customers potentially affected by its failure to produce e-mail.


With regulators raking LPL over the coals, the company has spent the last year-and-a-half beefing up its oversight of complex products such nontraded REITs and variable annuities, said Dan Arnold, its chief financial officer, in an interview Wednesday after the company's conference call with analysts.

Total expenses for the quarter increased 8.2% year-over-year, to $1.02 billion. LPL, however, “expects to have 8% expense growth fall into the low single digits,” he said.

LPL has increased the number of employees in its legal and risk departments by 41% since the start of 2013 and now has 636 employees in areas that focus on compliance and oversight, said Mr. Arnold, echoing comments made by Mr. Casady on the morning's conference call. Seventy of those employees work in product oversight for complex investments including variable annuities and nontraded REITs, he said.

The company is also continuing to increase its use of technology and automation in the oversight of its advisers, he said.

While not happy with this quarter's earnings, Mr. Arnold said he was sanguine regarding LPL's growth outlook for the second half of the year, particularly recruiting and retention, with expenses to be controlled better in the next six months.

“There are good, sound underlying characteristics driving growth,” he said, pointing to the second quarter's recruiting, which saw LPL gain 114 in net new advisers. LPL now has 13,840 registered reps and advisers, an increase of 3.2% from a year earlier.


What do you make of LPL's financial results?

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