LPL Financial LLC, the U.S. based wealth management advisory firm, with over 13,300 advisors must pay a total of $ 9 million as fine to the Financial Industry Regulatory Authorities (FINRA). They have been fined for significant e-mail system failures and giving false information to FINRA, the Wall Street’s watch dog. The fine also includes establishing a fund of $ 1.5 million fund to compensate brokerage customer claimants potentially affected by its failure to produce e-mail. On its part, LPL did not deny any of the charges made by FINRA. An official communication received from the company said “We recognize the importance of having effective policies, procedures and systems to review and retain e-mails, and regret this lapse due to oversight”, the statement also said that LPL had co-operated fully with FINRA over this lapse. This failure of LPL affected its ability to supervise its representatives and failure to comply with regulatory requests. Due its deficiencies in retaining and maintain an additional backup of important data, the 4th largest U.S. wealth management advisory firm, failed to produce all e-mails in arbitration proceedings and to certain private litigants even after reminders to do so.
Brad Bennet, Executive Vice President and Chief Enforcement Officer of FINRA said “As LPL grew, it did not expand its compliance and technology infrastructure, and as a result, it failed completely in its responsibility to responses to regulatory authorities and other requests”. The penalizing of LPL is seen as a warning to businesses to ensure their business does not outgrow their compliance systems. Security industry rules imply firms to store and review their e-mails for a set period to ensure compliance with procedures and prevent such acts from the companies which not only affect regulatory mechanisms but also public stakeholders. This is not the first time that LPL has been under the fault, the company, had recently settled a $ 2.5 million settlement with Massachusetts securities regulator for its failure to supervise brokers who sold investments in non traded real estate investment trusts (REIT).
Ignorance is bliss
As the wealth management advisory firm grew in its business, the firm did not pay adequate attention to update its e-mail systems, which in turn became too complex for LPL to manage and monitor effectively. The firm was aware of the increasing complexity of its computer systems and failure to save and retrieve its past data. FINRA found that from 2007 to 2013, LPL’s e-mail review and retention systems failed at least 35 times. Due to this failure, the firm was unable to meet all the requested e-mails from state regulators and certain private litigants and customers in arbitrary proceedings. Some of the significant failures of LPL are:
- From 2007 to 2013, LPL failed to supervise 28 million DBA’s (doing business as) e-mails sent and received by thousands of representatives who were operating in the capacity of independent contractors.
- It failed to maintain access of hundreds of millions of e-mails during its transition to a lesser expensive archive and 80 % of those e-mails became corrupt.
- From 2007 to 2013 it failed to keep and review 3.5 million Bloomberg messages.
- LPL reported these failures only on June 2011, and communicated to FINRA erroneously that it was not aware of the problem, although some its senior officials in the company were aware of the impending disaster.
The wealth management advisory firm is already facing several sales abuses and fines by other regulators. LPL, also said it is comprehensively redesigning its e-mail systems and other compliance systems by hiring experts from the industry and also training its employees to escalate compliance issues to supervisors when they are aware of the problems.