(Image: Bloomberg News)
(Image: Bloomberg News)

LPL Financial has taken its latest big regulatory hit -- but its troubles are probably not over yet.

After announcing last week that first-quarter profits had been hit by regulatory costs, the industry's largest independent broker-dealer has been censured by FINRA, fined $10 million and ordered to pay $1.7 million in restitution.

The fines were for widespread supervisory failures in the sales of nontraditional ETFs, certain variable annuity contracts, nontraded REITs and other complex products, and for failure to monitor and report trades and deliver to customers more than 14 million trade confirmations. LPL neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

LPL will pay restitution to certain customers who purchased non-traditional ETFs, and may pay additional compensation to ETF purchasers pending a review of its ETF systems and procedures.


"LPL's supervisory breakdowns resulted from a sustained failure to devote sufficient resources to compliance programs integral to numerous aspects of its business," Brad Bennett, FINRA's executive vice president and enforcement chief, said in a statement. "With today's action, FINRA reaffirms that there is little room in the industry for lax supervision and that it will not hesitate to order firms to review and correct substandard supervisory systems and controls, and pay restitution to affected customers."

LPL had anticipated the FINRA fines as part of what it has characterized as "historical" regulatory issues, says chief executive Mark Casady.

"It's a major one to have behind us," he says.

The fine is one component of the charges and accruals -- including $23 million announced in the company's third-quarter 2014 earnings -- already taken by LPL in prior quarters, Casady says.

But he cautions that the firm's regulatory cleanup is not over.

"We have a bit more to go," Casady says. "There are still a couple of matters that will be announced in due course."


LPL has changed its ways, Casady insists, citing a 53% increase since 2012 in head count in the IBD's compliance and risk oversight departments, as well as the replacement of "a number of systems" in the compliance unit.

Moreover, he says, LPL has continued to build up its risk management and comprehensive oversight of compliance issues -- "so we don't have these issues going forward."

The FINRA censure said that LPL did not have a system to monitor the length of time that customers held these ETFs, variable annuities and nontraded REITs in their accounts; did not enforce its limits on the concentration of those products in customer accounts; and failed to ensure that all of its registered representatives were adequately trained on the risks of the products.

FINRA also found that LPL's systems to review trading activity in customer accounts were plagued by "multiple deficiencies." As one example, the organization cited a surveillance system that failed to generate alerts for certain high-risk activity, including low-priced equity transactions, actively traded securities and potential employee front-running.

What's more, LPL "failed to reasonably supervise its advertising and other communications," including its registered representatives' use of consolidated reports, FINRA said. LPL did not "monitor the creation or use of consolidated reports, and failed to ensure that these reports reflected complete and accurate information," FINRA said in a statement.

In its own statement, LPL said it "has reached a comprehensive agreement with FINRA to resolve a series of regulatory issues that we have already remedied, or are in the midst of working to remedy, as part of the settlement and our ongoing commitment to enhance our business controls.

"While we are pleased to put the specific issues related to this agreement behind us," the LPL statement continued, "we understand that sustaining strong risk management and compliance requires constant focus and attention. LPL has made a long-term commitment to rebuilding its risk management and compliance infrastructure, and this resolution is a significant step in that process."

Investments in legal, risk management, compliance and other control functions are a "top priority for the company," the LPL statement concluded.

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