Finra said today that it has fined LPL $7.5 million for 35 separate significant e-mail system failures.
What's more, LPL Financial LLC made misstatements to the Financial Industry Regulatory Authority Inc. during its investigation of the failures. LPL also was ordered to create a $1.5 million fund to compensate brokerage customers potentially affected by its failure to produce e-mail.
"This is the largest fine Finra has imposed for an e-mail case," said Finra spokeswoman Michelle Ong.
LPL's e-mail review and retention problems occurred from 2007 to 2013, and its systems failed at least 35 times, according to Finra. The firm was unable to meet its obligations to capture e-mail, supervise its reps and respond to requests from regulators.
In concluding the settlement, LPL neither admitted nor denied the charges.
"In September 2011, we reported to Finra issues relating to the surveillance and retention of e-mails," LPL said in a statement. "We cooperated fully with Finra throughout its ensuing investigation. We very much regret our lapse of oversight. We have undertaken a comprehensive redesign of our e-mail systems and associated compliance policies and procedures, and have engaged independent experts to assess and validate our approach."
Over a four-year period, LPL failed to supervise 28 million "doing business as" e-mails sent and received by thousands of reps who were working as independent contractors, Finra said.
In response, LPL said in its statement: "Finra's action identified that certain LPL personnel had information that would have uncovered the DBA issue earlier than senior management was aware, and we have taken steps to train our employees on escalating compliance issues."
It is the second time this year that LPL has faced significant charges about compliance and oversight of its brokers and systems.
In February, the firm said it had paid a $500,000 fine and set aside $2 million in restitution to Massachusetts investors who bought nontraded real estate investment trusts from LPL brokers. The Massachusetts Securities Division had filed a complaint against LPL in December that involved investors who bought shares of several REITs in violation of state limitations, as well as the company's own rules and procedures
LPL, which has 13,000 registered reps and advisers, had its initial public offering in 2010 after a decade of rapid growth. Broker-dealers that grow at a breakneck pace often fall prey to compliance problems, as a rapidly growing sales force can overwhelm resources devoted to oversight and compliance.
Finra said that's what happened to LPL. "As LPL rapidly grew its business, the firm failed to devote sufficient resources to update its e-mail system, which became increasingly complex and unwieldy for LPL to manage and monitor effectively," Finra said in a statement. "The firm was well-aware of its e-mail systems' failures and the overwhelming complexity of its systems."
On the sidelines of Finra's annual conference in Washington today, Finra chairman and chief executive Rick Ketchum reiterated that point and said that the LPL case was not a shot across the bow of independent broker dealers. Rather, it was a matter of LPL growing too quickly and not being able to implement adequate technology and supervision controls to keep up with its rapidly expanding network of brokers.
"It doesn't suggest that there's something inherently flawed with the independent-contractor model," Mr. Ketchum told reporters.�"This is a case where they got over their own skis from the standpoint of the expansion that occurred."
Mr. Ketchum said that he has "a great deal of respect" for LPL and that the firm has a "great deal of integrity."
There can be problems associated with all investment-advisory models — and they've all gotten into trouble, Mr. Ketchum said.
"It's a big risk when you're expanding very quickly — and that, I think, is the message today," Mr. Ketchum said.
LPL chief executive, Mark Casady, who a member of Finra's board of governors, highlighted the e-mail surveillance issue April 25 in a call with Wall Street analysts who cover the company. LPL "recorded an expense related to the expected settlement of the Finra matter in the company's financial statements as of and for the three months ended March 31, 2013," the company statement said. "Therefore, the company does not anticipate any related charges in its operating results for the current quarter."
Reuters reported Monday that LPL was overhauling its compliance procedures in the aftermath of the recent regulatory complaints. The firm has added 137 people to its compliance staff over the past two years, according to the report, which cited LPL's president Robert Moore.
(Mark Schoeff Jr. contributed reporting for this article)
24 May, 2013
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Source: http://www.investmentnews.com/article/20130521/FREE/130529985
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