LPL agrees to $26 million settlement with states over unregistered securities

Firm will also buy back securities from investors, plus pay them 3% annual interest

May 2, 2018 @ 11:16 am

By Bruce Kelly

LPL Financial and the North American Securities Administrators Association on Wednesday morning announced a settlement that could total as much as $26 million when it is eventually closed.

Under terms of the settlement, LPL also has agreed to repurchase from investors securities held in LPL accounts determined to have been unregistered, non-exempt equity or fixed-income securities sold since Oct. 1, 2006.

Each offer also shall include 3% simple interest per year. Other requirements were agreed upon for investors holding affected securities sold or transferred from an LPL account. The total amount LPL might have to pay investors was not specified.

State laws require all securities to be registered or meet an exemption from registration. A non-exempt security is simply a security — certain penny stocks, for example — that are subject to registration.

Statements from LPL and NASAA did not give further details about the types of client transactions involved in the settlement other than stating they were unregistered, non-exempt equity or fixed income securities.

A variety of securities, ranging from illiquid private placements to municipal bonds, can potentially qualify for the exemption from registration. Any stock that does not have an effective registration statement on file with the Securities and Exchange Commission is considered unregistered.

Each of the jurisdictions participating in the settlement — 49 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands — will receive $499,000 upon entering a final consent order with LPL, thus the final settlement figure of $26 million if all ultimately participate. At this time, the state of California has not agreed to participate in the settlement.

In previous years, LPL has faced large fines and settlements from securities regulators but that had slowed down over the past couple of years. This is the largest regulatory matter, in terms of dollars, under the regime of Dan Arnold, who took over as CEO of the firm last year from Mark Casady, who retired.

In July 2017, NASAA established a task force with Massachusetts and Alabama as lead states to investigate LPL's failure to establish and maintain reasonable policies and procedures to prevent the sale of unregistered, non-exempt securities by LPL to its customers. LPL fully cooperated with the NASAA task force, according to NASAA.

The investigation focused on LPL's retention, use, and subsequent cancellation of certain third-party services integral to LPL's compliance with state securities registration requirements. State securities regulators also looked into certain other legacy deficiencies within LPL's compliance structure related to LPL's controls, monitoring and reporting tools, and escalation protocols regarding the firm's response to significant compliance issues.

"We take our compliance and risk management obligations seriously and will continue to dedicate resources to this important work moving forward," said LPL spokesman Jeff Mochal in a statement. "We believe these resources, combined with additional expertise we've hired in the field of blue sky compliance, position us well with respect to this issue in the future."


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