LPL Financial Contends With Ongoing Regulatory Battles

LPL Financial may be rapidly expanding its business model, but it no doubt could do without some of the attention it is receiving lately. As reported March 21 by the Wall Street Journal, LPL is increasingly in hot water with state and federal securities regulators, as well as with the Financial Industry Regulatory Authority (FINRA).

“LPL is on our radar screen more than any other firm,” said Lynne Egan, who oversees securities regulation in Montana, in the Wall Street Journal article. Last year, Egan accused LPL of failing to supervise a broker, and is preparing to bring another case against LPL involving multiple brokers.

Some of LPL’s problems may be connected to the way in which it addresses supervisory oversight. Nearly half of LPL’s brokers in Montana are registered as their own supervisor, while other firms place brokers under a separate manager.

One high-profile LPL case in Montana happened in 2009 when Donald Chouinard, an LPL broker in Kalispell, Montana, was sentenced to 10 years in prison for operating a Ponzi scheme. LPL paid Chouinard’s clients $1.3 million, plus a $150,000 fine to the state securities regulator.

Since the Chouinard case, however, Egan says little has changed in the way LPL approaches compliance. “Egregious problems” continue to unchecked, she notes in the Wall Street Journal story. In fact, the new case that Egan is preparing involves brokers who improperly sold complicated real estate investment trusts, or non-traded REITs, to unsophisticated investors.

Egan isn’t alone in her concerns about LPL and how it oversees its brokers. Over the past year and a half, state regulators in Illinois, Massachusetts, Oregon and Pennsylvania have cited LPL for failing to properly oversee its brokers. According to FINRA’s BrokerCheck Web site, LPL brokers have faced the most common industry reprimands more frequently than brokers at large firms since the beginning of 2012.

Meanwhile, independent brokerages like LPL are gaining in popularity with investors as big-name Wall Street brokerage firms fall out of favor. LPL Financial has 13,300 brokers, 6,500 offices, and 4.3 million clients. Unlike employees of the larger firms, LPL brokers operate much like a contractor. They have LPL e-mail addresses and come under LPL compliance but pay for office space and staff.

For LPL and its brokers, it is a mutually beneficial deal. With lower overhead costs, the company can pass a large percentage of commissions and fees – upward of 80% – back to LPL brokers.

At the same time, the high commissions may leave LPL with less money to dedicate to compliance. And, as the WSJ story points out, it also could attract brokers more interested in getting around rules and regulations.

A case in point is Montana. In the past five years, LPL’s 31 brokers there have been the subject of eight complaints to the state securities regulators. By comparison, Merrill Lynch, which has 42 representatives in Montana, has not faced any complaints.

In Massachusetts, Secretary of the Commonwealth William F. Galvin reached a $2.5 million settlement with LPL in February for selling non-traded REITs to investors in his state. Just like what happened in Montana, LPL failed to properly examine who its brokers had sold the products to and also had pushed the investments without mentioning the big commissions they brought for LPL and its brokers.

“What we really saw was a complete lack of supervision,” Galvin said in the Wall Street Journal article.

A similar incident happened 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 is one of 36 clients pursuing an arbitration case against LPL. Bender said he trusted the broker because of the LPL name on his business cards.

Ultimately, Bender 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.