LPL Financial Fined for FINRA Violations
Published On: February 6, 2024

On December 27, 2023, the Financial Industry Regulatory Authority ordered LPL Financial to pay $6.15 million in fees and restitution for several violations related to direct business and switch transactions made on behalf of their customers.

In a recent filing, FINRA laid out how LPL failed to supervise transactions made by their representatives, the reporting of said transactions, and, as a result, maintained inaccurate recording keeping. These are not the only violations LPL committed against their customers, but rather the foundation for further serious missteps down the road.

From January 2012 to August 2019, LPL Financial did not adequately supervise the reporting of direct business transactions made by their representatives on behalf of their clients. According FINRA’s filing, these transactions were supposed to be manually reported by the broker to LPL’s daily trade blotter. However, LPL did not have a system in place to ensure their brokers actually did so, resulting in 830,000 transactions missing from the firm’s exception reports.

These actions, or rather lack thereof, directly violated FINRA Rule 3110(a), and its predecessor NASD 3010(a), which requires member firms to enact and manage a system to monitor the activities of the firms’ representatives.  As mentioned in the filing, a violation of either of these rules is also a violation of FINRA Rule 2010, which requires that all member firms conduct their businesses with a “high standard of commercial honor and just and equitable principles of trade.”

In addition to this supervisory failure, LPL neglected to collect crucial information for their client’s investment profiles, including the customer’s investment objectives and risk tolerance. In some cases, even basic information, such as the customer’s age was overlooked. Such failures is a direct violation of FINRA Rule 2111, which states that all member firms and their representatives must determine the suitability of a recommended transaction or investment strategy based on information obtained in the customer’s investment profile.

This egregious oversight resulted in the firm making and maintaining inaccurate books & records, at their client’s expense. During a 2020 retrospective, LPL found the suitability of 13,000 transactions could not be identified due to these incomplete investment profiles and an estimated $546,000 of excessive sale fees were charged to their customers.

With this ineptitude came another violation, this time FINRA Rule 4511 which implicitly requires all member firms and associated persons to ensure accurate and complete books and records are maintained in compliance with FINRA rules, the Exchange Act, and its applicable rules. LPL did not have a supervisory system in place to comply with these requirements and failed to implement a process to verify if all necessary information was in fact collected.

LPL’s “Automated” Compliance System Couldn’t Track Sales Charges Accurately

But LPL’s negligence was not exclusive to direct business transactions. The supervision of sales charges associated with switching from one security to another, also known as “switch transactions,” were severely mishandled as well. The firm utilized an automated alert system to help identify and pull switch transactions, with potential suitability issues for further review. This tool directly extracted data, such as the sales charges associated with a certain product, from LPL’s databases. While this should work, in theory, a database is only as accurate as the information entered in it. In LPL’s case, the sales charges for products such as UIT’s and direct business mutual funds were completely missing. As a result, LPL supervisors were not made aware of potentially unsuitable transactions and the shady practices of the representatives that sold them. It was found that some representatives were recommending switching products meant for long-term investing to customers with much shorter investment time horizons in mind.

In some cases, representatives recommended clients sell UIT’s well before the maturity date and used the proceeds to buy a new UIT. The same occurred with class A mutual funds, which incur very high sales charges upfront. Unfortunately, the customer was the one left holding the bag, as approximately $31,000 in sales charges were paid to LPL for the very transactions they failed to identify.

Between February 2016 and June 2020, 11,300 letters were sent to customers erroneously misstating the sales fees associated with switch transactions. The first 9,800 switch letters stated that switches involving UIT’s and direct business mutual funds did not have a sales charge. This was, again, due to LPL’s databases missing the sales charge data for transactions which included these products.  Another 1,500 letters were sent to their customers listing the sales charges for the individuals’ most recent transactions rather than the switch purchase itself.

Errors Extended to BDC Investments Too

It should come as no surprise that LPL’s handling of investments related to Business Development Companies (BDC’s) was fraught with significant errors, as well. Listed BDC’s come with investment risks including, but not limited to, difficult to value portfolios due to the company’s lack of operating history and public disclosure and high fee structures that result in high operating fees & expenses. LPL’s inadequate supervisory system was not designed to ensure their Listed BDCs were compliant with FINRA Rule 2111, nor the Regulation Business Interest’s Care Obligation.

From November 2017 – 2022, the firm’s supervisory system failed to alert management when their representatives made recommendations of potentially overconcentrated investments. Such investments led to 16 low to moderate risk customers becoming overconcentrated and incurring approximately $73,930 in realized losses. As seen time and time again with LPL, the customers, who put their money & trust in this company, were left to pay for the firm’s embarrassingly incompetent mistakes.

What Should Victims of LPL Financial and their Representatives Do Next?

If you invested money with LPL Financial and have lost $50,000 or more due to recommendations for the securities listed above, you may have a claim to pursue FINRA arbitration. To be clear, suffering investment losses does not mean you have a claim. But if you suffered these losses due to recommendations made by LPL representatives for any of the mentioned securities, you should consider bringing FINRA arbitration claims against LPL Financial. The attorneys at Stoltmann Law Offices have represented clients in multiple arbitration forums and tried cases to conclusion in them, having recovered over $100 millions for clients since 2005.  If you received advice from LPL Financial representatives and lost money as a result, you should call Stoltmann Law Offices, P.C. at 312-332-4200 for a no-obligation, initial consultation with an experienced securities arbitration attorney. We are a contingency fee law firm which means we do not get paid unless you do.

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