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LPL fined $26M over advisors’ sales of unregistered securities

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LPL Financial must pay civil fines of up to $26 million to 52 U.S. states and jurisdictions plus review its advisors’ sales of unregistered securities dating back a dozen years for possible repurchases, under a settlement struck with two of the most prominent state regulators.

The North American State Securities Administrators Association and the nation’s largest independent broker-dealer unveiled the May 1 agreement after member regulators formed a task force in July to investigate sales of unregistered, non-exempt securities by LPL to its clients, according to NASAA.

LPL offered and sold the securities, while failing to “reasonably supervise the flow of information” to ensure compliance with state registration requirements, the regulators say. The settlement will result in LPL paying fines of $499,000 to each securities regulator entering into subsequent consent agreements.

The investigation uncovered negligence on the part of LPL for “canceling certain third-party services critical for compliance” with the guidelines, according to NASAA. The regulators also found that LPL had not invested sufficient resources for compliance and failed to supervise its advisors and other staff.

The agreement between LPL and the investigative task force led by Alabama Securities Commission Director Joseph Borg and Massachusetts Secretary of the Commonwealth William Galvin may be the largest ever in terms of the number of regulators joining at this stage, NASAA says. It’s also the highest payout involving NASAA since the early 2000s.

“Because of the states’ combined efforts, thousands of investors will benefit and be given the right to have their money returned, plus interest,” Galvin said in a statement.

Advisors should expect more regulatory requirements, enforcement actions and uncertainty in 2018, experts say.
December 11

While regulators stressed that they found no evidence of “willful, reckless or fraudulent conduct by LPL,” they faulted the firm for not maintaining adequate supervisory systems to prevent the sales of the unregistered, non-exempt equity or fixed-income securities since Oct. 1, 2006.

“We take our compliance and risk management obligations seriously and will continue to dedicate resources to this important work moving forward,” LPL spokesman Jeff Mochal said in a statement, referring to so-called blue-sky laws specific to states and distinct from federal regulations.

“We believe these resources, combined with additional expertise we’ve hired in the field of blue-sky compliance, position us well with respect to this issue in the future,” Mochal continued. “Our focus now is on offering remediation to investors who may have been affected.”

The settlement does not cover the vast majority of clients’ investments into stocks, mutual funds, insurance and annuities. However, it follows a similar agreement in September 2015 requiring LPL to pay a $1.4 million fine to 48 regulators plus restitution in connection with sales of non-traded REITS.

Regulators who didn’t join that deal later agreed to separate consent orders with LPL, but California was the only state not to join the latest settlement. LPL expects a third-party probe of the unregistered securities for possible repurchase or payment of damages with 3% annual interest to take several years.

LPL’s legal and regulatory expenses since 2013 have amounted to $116 million. Former CEO Mark Casady disclosed in a private arbitration hearing last year that the firm doubled or tripled its compliance staff between 2012 and 2016 under an overhaul of its policies and procedures.

The agreement obliges the firm to undertake another “top-to-bottom” review of how it adds new security products to its offerings and oversees them in order to assess LPL’s ability to comply with the state registration requirements. LPL will examine its protocols around vendor services as well.

Each state regulator signing on to the agreement will announce consent orders with LPL in coming months. In addition to the 49 states, the U.S. Virgin Islands, Puerto Rico and the District of Columbia also agreed to the task force’s settlement, says Borg, who is also president of NASAA.

“This investigation is representative of the aggressive and coordinated enforcement actions of state securities regulators and demonstrates the important investor protection role states serve in safeguarding investors nationwide,” Borg said in a statement.

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