Many investors are not aware that the broker-dealer firm with whom their financial advisor is registered has a legal obligation to reasonably supervise its employees. Accordingly, firms that fail to adequately supervise agents may be fined and penalized by regulators.
LPL Fined for Failure to Supervise Its Brokers
This week, one of the biggest broker-dealers in the country, LPL Financial, was fined $10 million for supervisory failures and ordered to pay $1.7 million in restitution to investors. This latest fine comes fast on the heels of several millions of dollars’-worth of previous fines by regulators over the past few years.
In 2007, LPL Financial embarked on an aggressive strategy to expand its business by gobbling up hundreds of small broker-dealers throughout the nation. Their pitch to prospective brokers was simple: less hassle and higher commissions than the Morgan Stanleys of the brokerage world. Within five years, LPL’s strategy nearly doubled its annual revenues. But, as the saying goes, “More money, more problems.”
In this case the problem was supervision. And it was big. And it hurt a huge number of LPL customers.
Failure to Supervise ETFs, REITs, Variable Annuities
According to the regulator’s findings (which LPL neither admitted nor denied), the broker-dealer failed to supervise its affiliated brokers on wide range of issues and products. A previous sanction included allegations that LPL neglected its duty to review broker emails to customers and allowed brokers to correspond with customers via personal email accounts, both of which are regulatory no-no’s.
This latest whopper of a fine is focused more narrowly on LPL’s failure to supervise its brokers’ recommendation and management of complex financial products like non-traditional exchange-traded funds or ETFs, real estate investment trust or REITs, and variable annuities.
According to FINRA, LPL did not monitor the length of time ETF products were held in customer accounts or the proportion of ETFs in any given account. These lapses are particularly dangerous with non-traditional ETFs since they typical reset daily and therefore are absolutely not recommended for medium or long-term investment. Along similar lines, LPL allowed its brokers to sell variable annuity products without disclosing surrender fees, and also failed to supervise the sales of risky and highly illiquid REITs.
While the initial order for restitution has been set at $1.7 million, customers who were financially injured by LPL’s lack of supervision over non-traditional ETFs may be entitled to additional compensation pending further investigation into the matter by FINRA.
