WASHINGTON, D.C. (May 2, 2018) – The North American Securities Administrators Association (NASAA) today announced that a settlement has been reached between LPL Financial LLC and state securities regulators requiring the firm to repurchase from investors certain securities sold since October 2006 and to pay civil penalties that could total more than $26 million.
The settlement stems from an investigation led by state securities regulators from Alabama and Massachusetts regarding the failure to establish and maintain reasonable policies and procedures to prevent the sale of unregistered, non-exempt securities by LPL to its customers.
Under terms of the settlement, LPL agreed to offer to repurchase from investors securities held in LPL accounts determined to have been unregistered, non-exempt equity or fixed-income securities sold since October 1, 2006. Each offer also shall include 3 percent simple interest per year. Other requirements were agreed upon for investors holding affected securities sold or transferred from an LPL account.
“This investigation is representative of the aggressive and coordinated enforcement actions of state securities regulators and demonstrates the important investor protection role states serve in safeguarding investors nationwide,” said Joseph P. Borg, NASAA President and Director of the Alabama Securities Commission.
“The action today represents the states at their best – working together on an extremely important investor protection matter. Because of the states’ combined efforts, thousands of investors will benefit and be given the right to have their money returned plus interest,” said Secretary of the Commonwealth William F. Galvin, who serves as the top securities regulator in Massachusetts.
In July 2017, NASAA established a task force with Massachusetts and Alabama as lead states to investigate LPL’s failure to establish and maintain reasonable policies and procedures to prevent the sale of unregistered, non-exempt securities by LPL to its customers. Borg said LPL fully cooperated with the NASAA task force.
The investigation focused on LPL’s retention, use, and subsequent cancellation of certain third-party services integral to LPL’s compliance with state securities registration requirements. State securities regulators also looked into certain other legacy deficiencies within LPL’s compliance structure related to LPL’s controls, monitoring and reporting tools, and escalation protocols regarding the firm’s response to significant compliance issues.
State securities regulators concluded that LPL offered and sold unregistered, non-exempt securities and failed to reasonably supervise the flow of information to ensure full and proper compliance with state securities registration requirements.
Borg noted that while state securities regulators found no evidence of willful, reckless, or fraudulent conduct by LPL, they did find that the firm failed to maintain adequate systems to reasonably supervise agents, staff, and employees to prevent the sale of unregistered, non-exempt securities. State investigators also determined that LPL failed to maintain books and records necessary to ensure full and proper compliance with state securities registration requirements; and failed to conduct appropriate and necessary due diligence regarding the retention, use, and subsequent cancelation of certain third-party services critical for compliance with state securities registration requirements.
LPL also was found to have acted negligently in canceling certain third-party services critical for compliance with state securities registration requirements; failed to supervise agents, staff, and employees in the performance of duties with respect to systems operation, process, and checks and balances to ensure compliance with state securities registration statutes, rules, and regulations; and failed to invest sufficient and appropriate resources in personnel, expertise, systems, and operations to adequately comply with state securities registration statutes, rules, and regulations.
As part of the settlement, LPL agreed to a “top-to-bottom” review of the integration of new securities products to assess this firm’s ability to comply with all state securities registration requirements, and all operations and procedures in connection with state registration requirements, that apply to the offer and sale of that product. The firm also agreed to a similar review of its vendor service protocols to ensure processes are in place for identification and management of critical services used to ensure compliance with state securities laws.
Each of the jurisdictions participating in the settlement – 49 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands – will receive $499,000 upon entering a final consent order with LPL.
Borg thanked staff members of the Alabama Securities Commission and the Massachusetts Securities Division for their invaluable assistance to successfully complete the investigation and negotiations.
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