LPL Financial Fined by FINRA for Failing to Supervise Sales of Alternative Investments

On March 24, 2014, LPL Financial LLC, the fourth largest broker dealer, measured by number of salespersons, was fined $950,000 by the Financial Industry Regulatory Authority (FINRA) for failing to supervise the way that its brokers marketed and sold nontraditional investments.  The fine is one of many that have recently been imposed on LPL and other “independent broker-dealers,” firms that provide products, marketing, and regulatory services to independent brokers who are not their full-time employees.

LPL Financial was alleged to have deficient supervision as it related to the sales of alternative investment products, including non-traded real estate investment trusts (REITs), oil and gas partnerships, business development companies (BDC’s), hedge funds, managed futures, and other illiquid pass through investments. FINRA found that from January 1, 2008, to July 1, 2012, LPL failed to adequately supervise the sales of theses alternative investments that violated concentration limits.

Investors often rely on professional advisors like LPL Financial, which help them to diversify their portfolio while minimizing risk. LPL, like many states, has limits in place, on the portion of a client’s portfolio that can be concentrated in these riskier, alternative investments. According to FINRA, however, LPL failed to ensure adherence to these limits. FINRA explained that between 2008 and 2012, LPL utilized a manual process that relied on outdated data to conduct suitability reviews. FINRA further stated that once LPL transitioned to a new automated review system, its database was built with faulty programming.

“LPL exposed customers to unacceptable risks by not having an adequate system in place,” said FINRA enforcement chief Brad Bennett. “It failed to train its registered representatives to apply all the suitability guidelines appropriately.”

This is one of several issues that LPL has recently faced. LPL also allegedly made misstatements to FINRA during its investigation of the above-mentioned failures. In addition, last March, FINRA said that it fined LPL Financial $7.5 million for 35 separate significant e-mail system failures.

Last May, LPL paid a $500,000 fine to the Massachusetts Securities Division and was ordered to pay $4.8 million in restitution for supervisory and suitability related violations involving the sale of non-traded REITs that were inappropriate for clients.  This penalty was just a portion of more than $11 million paid to the Massachusetts regulator’s office in restitution and fines from six firms related to REIT sales. The other ther firms included Ameriprise Financial Inc., Lincoln National, Commonwealth Financial Network, Royal Alliance Associates, and Securities America.

In concluding the investigation and handing down this most recent fine, Brad Bennett explained that “[i]n order to sell alternative investments, a broker-dealer must tailor its supervisory system to these products. LPL exposed customers to unacceptable risks by not having an adequate system in place that could accurately review whether a transaction complies with suitability requirements imposed by the states, the product issuers and the firm itself – and it failed to train its registered representatives to apply all the suitability guidelines appropriately.”

The attorneys at Gana LLP are experienced in representing investors concerning claims involving suitability, failure to supervise, and over-concentration. Our consultations are free of charge and the firm is only compensated if you recover.