The Financial Industry Regulatory Authority (FINRA) has imposed a fine of $6.5 million fine against LPL Financial, citing irregularities in establishing and maintaining a supervisory system. This supervisory system is in place for fingerprinting and screening, record retention, and supervision of consolidated reports.
LPL Financial, which is touted as the largest independent broker-dealer in the United States, has over 21,500 registered representatives working on its over 13,000 branch offices. The firm was accused by FINRA, stating the company failed to supervise consolidated reports which enabled one former broker to commit securities fraud, create and disseminate reports with false information.
FINRA issues a letter of acceptance, waiver, and consent alleging that the former LPL broker “exploited the firm’s supervisory deficiencies concerning its consolidated reports and stole at least $1 million of LPL customers’ money as part of a multi-year Ponzi scheme.”
James T. Booth, a longtime broker, who pled guilty to one count of securities fraud in October 2019, was banned by the SEC the following month. Booth worked with LPL from February 2018 through May 2019 but was later fired after allegations about misappropriating “multiple clients’ funds for his personal and business use became public. LPL, however, paid restitution to several LPL customers misguided by Booth.
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FINRA stated that LPL wasn’t wary of certain tools that its approved list of third-party vendors supplied to its registered representatives for generating and disseminating consolidated reports. The “non-finalized” consolidated reports created by LPL’s vendors were sent to the customers, mainly intended for internal use. LPL claims it did not receive any reports from the vendors, so the firm did not review them. FINRA claimed that the vendors gave access to the reports to its representatives and customers on the vendors’ websites without being reviewed by LPL first.
FINRA states that LPL failed to review the assets entered by representatives on consolidated reports despite being categorized as “non-securities related,” even though the assets were clearly securities-related. FINRA also alleged that LPL’s attempt to establish and maintain a supervisory system designed for the compliance of its record retention obligations was futile starting from January 2014 to September 2019.
Furthermore, FINRA claims that the failure of LPL has affected close to 87 million records and permanently removed communications records of over 1.5 million customers from its third-party data vendor. The data included records about mutual fund switch letters, 36-month letters, and wire transfer confirmation letters of over three years.
In August 2017, after failing to present the letters of certain customers to FINRA, LPL contacted its vendor to locate them. The vendor relayed to LPL that the records of 500,000 customer communications, including the letters, were missing. The vendor claimed the incident occurred because the records were stored in a temporary storage location, where it gets deleted after one year.
FINRA claims that the firm neglected to implement initiatives to validate the vendor when it migrates documents stored in a temporary storage location to a permanent location. Later, the vendor confirmed that the document migration did not happen and that about one million additional LPL customer communications were deleted.
Meanwhile, LPL also faces allegations for its failure to collect the fingerprints and screenings of over 7,000 non-registered associated persons, mostly technology professionals outside of the United States, aimed at statutory disqualification based on criminal convictions. LPL, however, admitted this failure and reported it to FINRA.
In January 2017, after submitting the fingerprints of its non-registered associated persons to FINRA, the broker-dealer was informed that one particular individual was disqualified after being convicted of a misdemeanor for possessing a forged instrument. However, FINRA stated that LPL allowed this individual to be associated with the company until September 2019.
To rectify its breach of operational procedures, LPL must maintain a third-party consultant to conduct and review its compliance reports in key areas mentioned in the AWC letter at its own expense. LPL never admitted or denied the allegations, but endorsed the letter.