Analysts question whether LPL is out of the regulatory woods

Boost in regulatory charges that cut third-quarter earnings estimate results in at least one ratings downgrade

Oct 23, 2014 @ 11:22 am

By Bruce Kelly

Analysts said LPL Financial Holdings Inc. still has plenty of questions hanging over it after cutting its third-quarter earnings forecast by 11 cents a share Tuesday to satisfy regulatory concerns.

LPL now expects its broker dealer, LPL Financial, to incur up to $23 million in charges — $18 million more than previously anticipated — to resolve undisclosed regulatory matters. On Wednesday, the first day of trading after the news was released, LPL's shares were down 6.5%.

LPL's revised charge “serves as a reminder that underspending on compliance in the past continues to haunt the franchise,” wrote Alex Kramm, an analyst with UBS Securities. “We believe the charges stem from LPLA's lack of sound record keeping around nontraded REITs and variable annuities and should reduce (third quarter) earnings by some 20%. We would hope that increased spending now sets the foundation for reduced expense in the future.”

“That said, it is too early to say if the company's issues are closer to being resolved,” wrote Mr. Kramm, whose rating of LPL's stock was unchanged at “neutral.”

“In short, LPLA has become a 'show me' story,” wrote Steven Chubak, an analyst for Nomura Securities International Inc. “We are increasingly cautious, as regulatory expenses have been steadily rising and have proven difficult to predict; we have no basis on which to suggest that these costs should begin to decline.”

Mr. Chubak downgraded LPL from “buy” to “neutral.”

(More: LPL Financial agrees to pay $541,000 for faulty variable annuities switches in Massachusetts)

“In speaking with management, we believe the regulatory issues are with multiple regulators and encompass multiple issues related to systems, policies and procedures, while the timeline remains uncertain around nearing the end of the regulatory overhang,” noted Citigroup Global Markets Inc. analyst William Katz, who maintained a rating of “neutral.”

In trading on Thursday, LPL's shares were rebounding as of the early afternoon, and were up 1.5%.

LPL's revised charges are expected to trim 11 cents a share, or 25%, from previously projected third-quarter earnings; the company expects earnings to come in at 32 cents to 34 cents a share, or $32 to $34 million.

Those charges are due to “regulatory matters relating primarily to issues involving LPL Financial's systems, policies and procedures,” the company said in a statement Tuesday after the market closed.

(Related: Selling away claims behind LPL's termination of James "Jeb" Bashaw)

"Beginning in the last weeks of the third quarter, we made progress towards the resolution of certain regulatory matters that contributed to us taking a larger than expected charge," stated Mark Casady, chairman and CEO of LPL Financial, in a statement. "The nature of these matters makes it challenging to identify and evaluate the exact timing and magnitude of their resolution, but we are now able to estimate the potential costs associated with addressing these regulatory matters.”

The company, which will hold a conference call next Thursday to discuss its earnings, expects net revenues to be in line with prior expectations, increasing to $1.1 billion.

The largest independent broker-dealer in the nation with 13,600 registered reps and financial advisers, LPL has been in regulators' cross-hairs for the past two years for a number of issues. The company has been ordered to or agreed to pay at least $20 million in fines, reimbursements and restitution over that period.

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