LPL says competitors could be on hot seat with regulators

Top executives at LPL Financial expect rival broker-dealers to face the same host of regulatory and compliance issues that LPL has confronted over the past few years.
The firm recently has taken its lumps from regulators, amassing a number of multi-million dollar fines and settlements. Now, other firms may be on the hot seat.
While LPL may still face a small number of significant actions by regulators this year, the company expects those costs to decrease in 2016, according to LPL’s chairman and CEO, Mark Casady. Meanwhile, across the industry, LPL sees elevated regulatory cost and inquiries, according to Mr. Casady, who made his comments on Wednesday morning during LPL’s second quarter earnings call with securities analysts.
“I expect competitors’ regulatory cost goes up from here,” as regulators complete investigations into LPL and dive deeper into the firm’s rivals, he said.
LPL Financial Holdings Inc., parent of the broker-dealer, reported a slight decline in net revenues for the second quarter ended June 30 compared to the same three months in 2014. Commission revenue was down for the period and the company reported net revenues of $1.09 billion, a decrease of 0.2% compared to the same period last year.
But a decline in expenses and restructuring charges helped boost earnings. Net income for the quarter increased 16.6% to $50.2 million from $43.1 million the year-earlier period while earnings per share increased to 52 cents from 42 cents.
SCRUTINY OF FUND DISCOUNTS
On the call, Mr. Casady did not name specific areas that regulators are examining at broker-dealers. However, LPL’s acting chief financial officer, Tom Lux, in an interview after the earnings call said he expected broker-dealers to face regulatory scrutiny over discounts investors are supposed to receive for buying mutual funds.
The Financial Industry Regulatory Authority Inc. last month ordered LPL to pay $6.3 million in restitution to clients after it failed to waive sales loads for certain mutual fund shares sold between July 2009 and the end of 2014. At the same time, Finra ordered two other firms to pay significant fines for the same issue.
“We and others are working with mutual fund complexes” to improve the processes of awarding appropriate mutual fund discounts, Mr. Lux said. “There’s been a history of broker-dealers with challenges to stay on top of” such discounts, he said.
If the rest of the independent broker-dealer industry is about to have LPL’s recent experience with regulators, it could prove to be an enormous challenge. LPL has been in the spotlight over the past few years due to its host of problems with Finra as well as state regulators. Two products that have caused LPL to pay fines or restitution to clients have been nontraded real estate investment trusts, a popular alternative investment, and variable annuities.
SUPERVISORY FAILURES
For example, Finra in May ordered LPL to pay $11.7 million in fines and restitution for what it deemed “widespread supervisory failures” related to sales of complex products, according to a settlement. From 2007 to as recently as April, LPL failed to properly supervise sales of certain investments, including certain exchange-traded funds, variable annuities and nontraded REITs, and also failed to properly deliver more than 14 million trade confirmations to customers, according to Finra.
Mr. Casady has recently said that the firm is near the finish line with fines and settlements stemming from regulatory actions.