New York Securities Lawyer Blog
On May 6, 2015, LPL Financial LLC (“LPL”) submitted a Letter of Acceptance, Waiver and Consent (“AWC”) to the Financial Industry Regulatory Authority’s (“FINRA”) Department of Enforcement to settle allegations that LPL violated FINRA supervisory rules. The AWC was submitted “without admitting or denying the findings,” and on the condition that, if accepted, “FINRA will not bring any future actions against LPL alleging violations based on the same factual findings.”
LPL has been a FINRA member firm since 1973, is headquartered in Boston, MA and has approximately 18,343 registered representatives operating from approximately 10,702 registered branch office locations and 18,396 non-registered office locations. LPL is the largest organization of independent financial advisors in the United States based on total revenue. In 2007, LPL Financial Holdings, Inc., LPL’s parent company, expanded LPL’s broker-dealer business by acquiring other financial services firms and recruiting registered representatives from other broker-dealers. From 2007 to 2013, the number of registered representatives at LPL more than doubled from 8,322 to 17,601 and LPL’s revenue increased from $2.28 billion to $4.05 billion. According to FINRA, while LPL’s business grew, LPL failed to similarly increase its supervisory resources, resulting in inadequate supervisory systems and procedures.
Specifically, according to FINRA, LPL failed to properly supervise its representative’s sale of non-traditional exchange traded funds (“non-traditional ETFs”), variable annuities, mutual funds, and illiquid or non-exchange-traded real estate investment trusts (“non-traded REITs”). Non-traditional ETFs are a class of complex products that include leveraged, inverse and inverse-leveraged ETFs, which seek to earn a multiple of the performance of the underlying index or benchmark or earn a return inverse to the return of the benchmark’s performance, or both. Generally, non-traditional ETFs utilize swaps, futures contracts, and other derivatives instruments to achieve these objectives. According to FINRA, LPL failed to review the length of time for which these securities were held by customers, despite written supervisory procedures which require monitoring non-traditional ETFs on a daily basis. This is especially important because many of these products “reset” daily and over time, that resetting function can cause the specific non-traditional ETF’s performance to deviate significantly from the index it tracks. Additionally, the short positions taken by inverse ETFs contain more risk than a corresponding long position because the potential for loss in a short position is limitless. FINRA further alleged that LPL failed to enforce its written supervisory procedures with respect to account allocation limits for non-traditional ETFs, and failed to ensure that its registered representatives were adequately trained to sell non-traditional ETFs. FINRA alleged that LPL violated National Association of Securities Dealers (“NASD”) Rule 3010(b) and FINRA Rule 2010, which state that “[a] member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.”