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Regulatory Sanctions

LPL Financial Fined $2.75Mn for Failing to Report Complaints and Suspicious Activities

October 31, 2018

LPL Financial agreed to pay a $2.75 million fine to settle FINRA charges pertaining to complaint-reporting and AML program failures spanning more than 3 years. The Boston, MA-based firm, a FINRA member since 1973, conducts a general securities business with approximately 20,000 registered persons operating out of over 12,000 branch offices.


FAILURE #1 - As a result of its unreasonably designed AML Program, … the Firm failed to investigate certain attempts to gain unauthorized access to electronic systems and potential illegal activity carried out by electronic systems (collectively "cyber-related events") that should have resulted in the filing of Suspicious Activity Reports ("SARs"). This failure stemmed primarily from the Firm's use of a "fraud case chart" that provided inaccurate guidance to the Firm's AML employees concerning investigation and reporting requirements associated with suspicious activity related to incidents when 3rd parties used electronic means to attempt to compromise a customer's email or brokerage account. As a result of employees' reliance on the inaccurate fraud case chart, among other things, the Firm failed to investigate certain cyber-related events and to file more than 400 SARs - over half of the subsequently filed SARs indicate that the cyber-events were unsuccessful.


FAILURE #2 - Firm failed to file or amend Forms U4 or U5 to report certain customer complaints. … Specifically, the Firm too narrowly interpreted the requirement that a complaint contain "a claim for compensatory damages of $5,000 or more." The Firm incorrectly interpreted this phrase to mean that it was not required to report any complaint that did not expressly request compensation, even in instances when the customer alleged a specific sales practice violation that caused him or her a loss of $5,000 or more, and the complaint, when viewed as a whole, made clear that the investor was seeking compensation for such loss. As a result, the Firm failed to report on Forms U4 and U5 at least 31 reportable customer complaints alleging sales practice violations involving the Firm's registered reps. The Firm also failed to amend in a timely manner its registered reps’ Forms U4 and U5 to disclose at least 149 customer complaints and other reportable events, including judgments, bankruptcies, terminations, and regulatory and criminal actions.


By reason of the foregoing, LPL violated Section 2 and Section 3 of Article V of the FINRA By-Laws (Registered Reps and Associated Persons), NASD Rule 3010, and FINRA Rules 3110 (Supervision), 3310 (AML Compliance Program) and 2010.



WHAT PROMPTED THESE MATTERS?    Three investigations: 

  • INVESTIGATION #1 - When FINRA examined the compromise of an email account of an LPL customer that led to the customer's loss of $9,500, LPL informed the Staff that it did not file a SAR to report the incident, but then determined that it should have done so. Shortly thereafter, LPL disclosed to the Staff that the Firm had identified widespread gaps in its investigations related to certain attempted and successful cyber-related events that may have resulted in missed SAR filings. As a result, the Firm voluntarily conducted a review of its SAR filing practices beyond cyber-related events and reported its review findings to FINRA.


  • INVESTIGATION #2 - When FINRA examined a customer complaint alleging that an LPL registered rep had made investment-related misrepresentations causing the customer losses of over $200,000, LPL said it had not reported this complaint on the rep’s Form U4, because "a U4 amendment is not required to disclose this complaint because it does not contain a claim for compensatory damages .... Although the [customers] allege that their losses are over $200,000, their letter does not request the return of those funds or state any other claim for damages." The Staff disagreed with the Firm's explanation, and expanded its review.


  • INVESTIGATION #3 - A trend analysis review by FINRA showed that LPL had more late Form U4 and Form U5 filings than the industry average. At the Staff's request, LPL provided information relating to the late filings during this period, which the Staff reviewed and analyzed.



[For further details, click on FINRA Disciplinary Actions Online and reference CASE #2016050751901.]