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LPL Has Regulators’ Attention

LPL Financial has more than 13,000 brokers, 6,500 offices and some 4.3 million customers. It’s also got a lengthy list of issues with state and federal securities regulators.

LPL specializes in selling complex investments, including non-traded real estate investment trusts, or REITs. In the past year, state regulators in Illinois, Massachusetts, Montana, Oregon and Pennsylvania have all penalized LPL for failing to oversee its brokers properly.

As reported in a recent New York Times article, LPL brokers have faced the most common industry reprimand more frequently than brokers at its large competitors since the beginning of 2012.

“LPL is on our radar screen more than any other firm,” said Lynne Egan, who oversees securities regulation in Montana, in a March 21 story in the New York Times.

Earlier this year, LPL Financial agreed to a multimillion-dollar settlement connected to allegations by Massachusetts’ securities regulators that it failed to supervise representatives who sold investments in the products.

Secretary of the Commonwealth William Galvin filed a complaint against LPL in December 2012. In the complaint, Galvin alleged that LPL was in violation of both state limitations and the company’s rules. The Securities Division also charged LPL with dishonest and unethical business practices.

The Massachusetts complaint focused on seven REITs: Inland American, Cole Credit Property Trust, II, Cole Credit Property Trust, III, Cole Credit Property 1031 Exchange, Wells REIT II, W.P. Carey Corporate Property Associates 17 and Dividend Capital Total Realty.

As part of the Massachusetts settlement, LPL agreed to pay restitution of $2 million to Massachusetts investors who bought seven non-traded REITs plus a $500,000 administrative fine.

Similarly, in Washington State last year, authorities brought a case against a LPL broker who had sold non-traded REITs to dozens of older clients. Richard Bender was one of those clients. He said he had trusted the broker because of the LPL name on his business cards.

That trust, however, was soon broken. Bender he lost about half his retirement savings, and is now trying to renew his Teamsters membership so he can drive trucks again.

“I can’t enjoy my golden years,” he says.

Many investors are turning to independent brokerage firms like LPL. Unlike employees of the industry giants, LPL brokers are essentially contractors who receive LPL e-mail addresses and come under LPL compliance but pay for office space and staff.

For LPL and its brokers, the arrangement is a profitable one. Low overhead costs means LPL can pass a bigger percentage of commissions and fees – upward of 80% – back to its brokers.

In May, the Financial Industry Regulatory Authority (FINRA) announced that it had fined LPL $7.5 million for 35 separate significant e-mail system failures. In addition, FINRA says LPL Financial LLC made misstatements to FINRA during its investigation of the failures. LPL also was ordered to create a $1.5 million fund to compensate brokerage customers potentially affected by its failure to produce e-mail.

“This is the largest fine Finra has imposed for an e-mail case,” said FINRA spokeswoman Michelle Ong in a statement.


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