LPL Financial sanctioned by FINRA for BDC supervisory failures

The Financial Industry Regulatory Authority (FINRA) has issued a Letter of Acceptance, Waiver, and Consent (AWC) against LPL Financial LLC, a notable member firm in the securities industry. The AWC alleges a series of alleged rule violations that occurred over several years, painting a picture of insufficient supervision and inaccurate information dissemination to customers. Let’s delve into the details of this regulatory action and what it means for investors and the securities industry at large.

Background: LPL Financial LLC

LPL Financial LLC, a long-standing member of FINRA since 1973, operates as a significant player in the securities industry and is one of the larger “independent” FINRA firms. Headquartered in Fort Mill, South Carolina, LPL boasts a considerable network, with over 27,000 registered representatives across more than 18,000 branch offices. Most advisors who are registered with independent firms operate out of small one or two advisor offices. Although independent firms have the same supervisory duties and more traditional firms with big branch offices, proper supervision does not always occur.

Overview of Allegations

The allegations against LPL Financial LLC span a significant timeframe, from January 2012 to November 2022. Among the key alleged violations cited by FINRA include the firm’s failure to reasonably supervise transactions conducted directly with product sponsors on behalf of customers. This lack of oversight led to approximately 830,000 transactions not being reported, raising concerns about potential sales practice violations and unsuitable recommendations.

Moreover, LPL’s shortcomings extended to inaccurate information provided to customers regarding switch transactions, where approximately 11,300 letters were found to contain misleading fee information. This negligence in supervision and communication not only violated FINRA rules but also compromised the interests of customers.

Furthermore, the firm failed to establish a proper supervisory system for recommendations involving publicly traded securities of business development companies (BDCs which are considered “alternative” investments), leading to potential overconcentration in Listed BDC investments for certain customers. The AWC stated: “LPL also failed to have a reasonable supervisory system to ensure the collection of information for its direct business customers’ investment profiles—such as the customers’ ages, investment time horizons, and liquidity needs—that was relevant for making suitability determinations. LPL relied on its representatives to collect such information by completing new account forms for direct business transactions. However, the firm did not take steps to ensure that representatives completed the new account forms.”

Consequences and Sanctions

In response to these violations, LPL Financial LLC has consented to several sanctions imposed by FINRA, including a censure, a substantial fine of $5.5 million, and restitution totaling $651,374.51 plus interest. Additionally, the firm is required to undertake remedial actions within a specified timeframe to address the identified issues and ensure compliance with regulatory standards.

Contact a Securities Fraud Lawyer if you may have a claim.

If you think you may have a potential claim for unsuitable investments or failure to supervise against a financial advisory firm such as LPL, please contact Scott Greco for a free attorney consultation about your case.