The Financial Industry Regulatory Authority Inc. closed out 2020 by hitting LPL Financial, the largest independent broker-dealer in the industry, last Thursday with a $6.5 million fine due to shortcomings in a variety of supervisory issues, ranging from record keeping to fingerprinting of non-registered employees and supervision of advisers' consolidated reports.
One former LPL broker exploited the weak supervision of consolidated reports, essentially documents that summarize customers' assets, to send reports containing fictitious assets to several LPL customers as part of a $1 million Ponzi scheme, according to Finra.
The broker, identified only as JTB in the settlement, was eventually arrested and pled guilty to securities fraud, according to Finra. The broker ran the fraudulent scheme while he was registered with other firms and not just LPL, Finra noted, and LPL has paid restitution to clients harmed in the matter.
LPL has a history of compliance problems and facing scrutiny from regulators like Finra and states. In 2014 and 2015 alone, the firm paid $70 million in fines and restitution to customers, a staggering sum for a retail-focused broker-dealer.
More recently, LPL has not faced as many severe penalties, although Finra in 2018 fined LPL $2.75 million for failing to list dozens of customer complaints against its brokers and for not filing hundreds of suspicious activity reports in its anti-money laundering program.
LPL's settlement with Finra covers the period from January 2014 to September 2019. During that time, LPL failed to fingerprint more than 7,000 non-registered associated persons and failed to screen these individuals for disqualification based on criminal convictions, according to Finra, allowing one employee who should not have been hired to work at the firm.
LPL also failed to retain electronic records in the required format, according to Finra, affecting at least 87 million records and led to the permanent deletion of over 1.5 million customer communications maintained by a third-party data vendor.
It also fell short in supervision of consolidated reports generated by outside vendors that its advisers used, according to Finra. The vendors did not send the reports to LPL and the firm did not review them.
LPL accepted the settlement without admitting or denying Finra's findings.
"We take our compliance obligations seriously, and have been proactive in identifying, reporting and remediating these issues," LPL spokesperson Jeff Mochal wrote in an email. "We’ve made significant investments to strengthen our capabilities related to this important work."
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