A $9 million payment by LPL Financial to settle a FINRA regulatory matter offers a cautionary tale for other firms, industry sources say.

FINRA says it has ordered LPL Financial, the nation's No. 1 independent broker-dealer, to pay a total of $9 million for alleged "significant" email system failures and for making misstatements to the regulator.

The amount includes a $7.5 million fine -- the largest ever ordered by the regulator for an email violation, a FINRA spokeswoman tells Financial Planning -- as well as a $1.5 million fund to compensate brokerage customers potentially affected by email violations, according to a FINRA statement.

Brad Bennett, FINRA’s executive vice president and chief of enforcement, said in a statement that “this case sends a strong message to firms to make sure your business does not outgrow your compliance systems."


Securities industry rules order brokerages to store and review emails for a certain period to ensure compliance with procedures and prevent possible wrongdoing. LPL failed to do that, FINRA says, alleging also that LPL made material misstatements to the authority during its investigation of the firm's email failures.

LPL has neither admitted nor denied the allegations, but has agreed to the payouts and said it was making big changes to both compliance and technology. “We have undertaken a comprehensive redesign of our email systems and associated compliance policies and procedures, and have engaged independent experts to assess and validate our approach,” LPL said in a statement.

"We cooperated fully with FINRA throughout its ensuing investigation.” LPL also said. “We recognize the importance of having effective policies, procedures and systems to review and retain emails, and we very much regret our lapse of oversight.”

One social media and compliance specialist suggested that LPL should have been more vigilant. “Firms really have no legitimate excuse not to comply,” Joanna Belbey, social media and compliance specialist at Actiance, said via email. She added that regulators now recognize that robust technology has existed for many years, allowing firms to comply with recordkeeping rules and regulations for electronic communications.


Other advisors suggested that the violations were a consequence of LPL’s rapid growth. A perennial No.1 in the annual FP50 ranking of independent broker-dealers, LPL’s revenues have soared from $2.57 billion in 2009 to $3.58 billion in 2012, according to the latest FP50 survey.

“LPL is a big firm that has been growing rapidly,” said David Kuenzi of Thun Financial Advisors. “I assume this might have been a technical issue -- moving from one system to another system as LPL has been building out their networks. ... Everyone in the industry knows retention of client contacts is important -- anyone who has been audited by regulators knows this is something they’ll look at all the time.”

Yet FINRA says LPL failed to devote sufficient resources to updating its email systems. "The firm was well aware of its email systems failures and the overwhelming complexity of its systems," FINRA said in the statement.

The FINRA announcement follows other regulatory woes for LPL. In February, Massachusetts Secretary of the Commonwealth William Galvin announced a $2.5 million settlement with LPL over the alleged sale of non-traded REITs to unsophisticated investors. The Massachusetts settlement cited $28 million in non-traded REIT sales to nearly 600 clients in Massachusetts between 2006 and 2009.

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