Poor supervisory procedures cost LPL Financial LLC $6.5M

What’s FINRA looking for this year?
February 24, 2021
What’s the SEC looking for this year?
March 10, 2021

LPL Financial Services LLC has agreed to pay the Financial Industry Regulatory Authority (FINRA) $6,500,000 in response to an AWC censuring and fining the firm. In addition, LPL must retain a third-party consultant to conduct a comprehensive review of its compliance.

Why did FINRA censure LPL?

FINRA entered findings that the Fort Mill, SC firm failed to establish and maintain a supervisory system, including written procedures, reasonably designed to achieve compliance with regulatory obligations including record retention, fingerprinting and screening of associated persons, and supervision of consolidated reports.

Among other issues, FINRA says LPL failed to retain electronic records in the required format, preserve specific electronic records and notify the Authority before employing electronic storage media. The firm’s failure affected at least 87 million records and led to the permanent deletion of over 1.5 million customer communications maintained by a third-party data vendor. Further, the firm failed to send account notices to over one million customers required to be sent at 36-month intervals for each account in which a suitability determination had been made.

FINRA also found that the firm failed to fingerprint non-registered associated persons and thus failed to screen them for statutory disqualification based on criminal convictions. Nor did LPL create or maintain required fingerprint records for the persons that it did not fingerprint. This failure arose from the firm’s inability to maintain a reasonable supervisory system and procedures to identify and adequately screen all persons who became associated with the firm in a non-registered capacity.

Good news? The firm did self-report its failure to FINRA and launched a remedial review.

Guilt by (disqualified) association

Separately, FINRA also found that LPL permitted a non-registered associated person, subject to statutory d

disqualification to remain associated with the firm.

What was LPL’s WSP failure?

According to FINRA, the firm failed to establish and maintain a supervisory system reasonably designed to supervise specific consolidated reports. The firm was not aware of, and therefore failed to reasonably supervise, tools that its approved third-party vendors provided to the firm’s registered representatives to create and disseminate consolidated reports. In particular, the firm’s vendors created non-finalized consolidated reports, which, although intended for internal use, could be sent to customers.

However, the vendors did not send these reports to the firm, which, of course, did not review them. The firm’s vendors also allowed representatives and customers to access consolidated reports on the vendors’ websites directly. LPL did not receive or review consolidated statements that its representatives disseminated in this manner. LPL also failed to check assets that were manually entered by representatives on consolidated reports when the representatives categorized them as non-securities related, even when the manually entered assets were clearly securities-related.

Lack of oversight leads to a Ponzi exposure

A former LPL representative exploited these supervisory deficiencies in perpetrating a Ponzi scheme through

which he converted at least $1,000,000 of the firm’s customers’ money. In this misdeed, the former

representative provided some of his customers with direct access to the website of one of the approved third-party vendors, where they were able to access consolidated reports that contained fictitious, manually added assets. The former representative also directly accessed the website of the vendor on at least one day.

Where was compliance?

Busy elsewhere? Until someone noticed the exposure and sounded the alarm. But that’s not you or your company, right? Because compliance professionals like you and your team rely on the cloud-based compliance solutions Patrina delivers. For more than 25 years, Patrina has been helping compliance professionals like you 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, designated third-party services, comprehensive, 8-module compliance solution, compliant data capture, file storage, and records archiving specifically designed for the financial services community. Be smart. Be covered. Let’s talk.

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