LPL Financial agreed to buy back “illegally sold” securities from investors in Massachusetts, as part of a $26 million settlement the firm entered into in May for allegedly selling unregistered securities.
Massachusetts is the first state to come to an agreement with the industry’s largest broker-dealer that will allow investors in the state to get their money back and to reinvest it, says Secretary of the Commonwealth William Galvin.
“This agreement will give Massachusetts investors who were misled when they were offered these unregistered securities the chance to get their money back, with interest, and re-invest it in a way that works best for them,” Galvin said in a statement.
As part of the original settlement, LPL is required to buy back the securities at a 3% simple interest rate, from every state except California, in addition to the District of Columbia, the U.S. Virgin Islands and Puerto Rico.
A taskforce of 52 regulators uncovered negligence on the part of LPL for “canceling certain third-party services critical for compliance,” according to the North American State Securities Administrators Association, which spearheaded the investigation.
While state securities regulators found no evidence of willful, reckless or fraudulent conduct by LPL, the firm failed to maintain adequate systems to reasonably supervise agents, staff and employees to prevent the sale of unregistered, non-exempt securities.
The investigation may have been the largest ever in terms of the number of regulators participating, NASAA said last month. It’s also the highest payout involving NASAA since the early 2000s.
The firm will now work with a third-party reviewer to analyze transactions dating back to October 2006, a process that could take several years, according to LPL. The firm also consented to a full assessment of its compliance safeguards.
“The settlement relates to our obligation to maintain appropriate controls to prevent the sale of certain equity and fixed-income securities that may not be properly registered in each state,” says an LPL spokesman, adding that the firm expects to come to similar agreements with at least some of the remaining 51 entities.
The NASAA settlement required LPL to pay a fine in the amount of $499,000 to each of the 52 U.S. states and territories, or $26 million if all states participate. That is in addition to buying back the unregistered securities from investors.
LPL’s legal and regulatory expenses since 2013 have amounted to $116 million. Former CEO Mark Casady disclosed in a private arbitration hearing last year that the firm doubled or tripled its compliance staff between 2012 and 2016 under an overhaul of its policies and procedures.
“We take our compliance and risk management obligations seriously and will continue to dedicate resources to this important work,” says an LPL spokesman. “Our focus now is on offering remediation to investors who may have been affected.”
LPL neither admitted nor denied the violations in the consent order.