NASAA Settles with LPL

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LPL Financial in more than $26 million worth of trouble

Early this month, the North American Securities Administrators Association (NASAA) State Securities Regulators (NASAA) hit LPL Financial LLC with a double whammy settlement. The agreement requires LPL Financial to repurchase specific securities the firm sold from October 2006 on and to pay civil penalties expected to total more than $26 million. Ouch! That’s gotta hurt a least a little bit?

Under terms of the settlement, LPL Financial also agreed to offer to repurchase securities held in LPL accounts from investors that were determined to have been unregistered, non-exempt equity or fixed-income securities sold since October 1, 2006. Each offer will include an additional three percent simple interest per year. The firm also agreed to other terms for investors holding affected securities sold or transferred from an LPL account.

Nailed by a national team of state regulators

In July 2017, the NASAA established a task force with Massachusetts and Alabama as lead states to investigate LPL’s failure to establish and maintain reasonable policies and procedures to prevent the sale of unregistered, non-exempt securities by LPL to its customers. To the firm’s credit, says Joseph Borg, NASAA President and Director of the Alabama Securities Commission, LPL fully cooperated with the NASAA task force.

The investigation focused on LPL’s retention, use, and subsequent cancellation of certain third-party services integral to LPL’s compliance with state securities registration requirements. State securities regulators also looked into certain other legacy deficiencies within LPL’s compliance structure related to LPL’s controls, monitoring and reporting tools, and escalation protocols regarding the firm’s response to significant compliance issues. The investigating regulators ultimately concluded that LPL offered and sold unregistered, non-exempt securities and failed to reasonably supervise the flow of information to ensure full and proper compliance with state securities registration requirements.

LPL Financial’s sale of unregistered, non-exempt securities was uncovered during the investigation led by state securities regulators from Alabama and Massachusetts. Regulators from 48 states charged that LPL Financial failed to establish and maintain reasonable policies and procedures to prevent the sale of unregistered, non-exempt securities by LPL to its customers.

Legacy compliance structures found deficient

The investigation focused on LPL’s retention, use, and subsequent cancellation of certain third-party services integral to LPL’s compliance with state securities registration requirements. State securities regulators also looked into other legacy deficiencies within LPL’s compliance structure related to LPL’s controls, monitoring and reporting tools, and escalation protocols regarding the firm’s response to significant compliance issues.

The state securities regulators concluded that LPL offered and sold unregistered, non-exempt securities and failed to reasonably supervise the flow of information to ensure full and proper compliance with state securities registration requirements.

“The action today represents the states at their best,” said Secretary of the Commonwealth William Galvin, who serves as Massachusetts’ top security regulator. “Because of the states’ combined efforts, thousands of investors will benefit and be given the right to have their money returned plus interest.”

Alabama’s Borg noted that while state securities regulators found no evidence of willful, reckless, or fraudulent conduct by LPL, they did find that the firm failed to maintain adequate systems to reasonably supervise agents, staff, and employees to prevent the sale of unregistered, non-exempt securities. State investigators also determined that LPL failed to maintain books and records necessary to ensure full and proper compliance with state securities registration requirements; and failed to conduct appropriate and necessary due diligence regarding the retention, use, and subsequent cancelation of certain third-party services critical for compliance with state securities registration requirements.

As part of the settlement, LPL agreed to a “top-to-bottom” review of the integration of new securities products to assess this firm’s ability to comply with all state securities registration requirements, and all operations and procedures in connection with state registration requirements, that apply to the offer and sale of that product. The firm also agreed to a similar review of its vendor service protocols to ensure processes are in place for identification and management of critical services used to ensure compliance with state securities laws.

Each of the jurisdictions participating in the settlement – 49 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands – will receive $499,000 upon entering a final consent order with LPL.

Were out-of-date compliance tools the problem?

Perhaps and compounded by the firm’s faulty recordkeeping, oversight, and other pennywise and pound foolish decisions. Compliance matters and in this instance, canceled contracts and legacy compliance tools cost LPL Financial well over $26 million. A more robust compliance solution and more careful oversight might have safeguarded LPL Financial from significant financial exposure. That’s where Patrina can help. We’ve built a business on helping organizations stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective and comprehensive, 8-module compliance solution, and compliant data capture, file storage, and records archiving specifically designed for the financial services community. Be smart. Be covered.

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