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FINRA Fines LPL For Supervision Lapse on Alternative Sales

The industry regulator slapped LPL Financial with a $950,000 fine on Monday, alleging the broker-dealer failed to adequately supervise sales of non-traded REITs and other alternative investment products.

Monday's fine is the latest in a series of regulatory cases against LPL and other  independent broker-dealers over the sale of alternative products, specifically non-traded REITs. According to FINRA, LPL’s compliance personnel and order review system failed to consistently identify investments—such as non-traded REITs, oil and gas partnerships, business development companies, hedge funds, managed futures and other illiquid pass-through investments—that fell outside suitability guidelines. A sampling revealed LPL approved 106 transactions that failed to meet suitability standards.

“LPL is pleased to have resolved this matter following an investigation in which we cooperated fully with FINRA staff,” spokeswoman for LPL Betsy Weinberger said in a statement Monday. “LPL Financial and its advisors remain committed to ensuring investing clients are well served now and in the future.”

FINRA’s fine follows LPL’s $2.5 million settlement with Massachusetts' securities regulator last February over similar violations. A complaint filed in December 2012 by Secretary of the Commonwealth William Galvin’s office claimed LPL failed to supervise its brokers selling $28 million of non-traded REITs to almost 600 clients from 2006 to 2009.

In its investigation, FINRA found that LPL’s supervisory violations started in January 2008 and ran through July 2012.  According to the regulator, LPL initially used a manual process to determine if alternative investments met the required suitability standards, but the system relied on information that was at times outdated and inaccurate. Later the firm upgraded to an automated review system, but FINRA claims this database was also flawed.

Additionally, LPL did not adequately train its compliance staff to analyze state suitability standards as part of the review process, FINRA claims.

“LPL exposed customers to unacceptable risks by not having an adequate system in place that could accurately review whether a transaction complies with suitability requirements imposed by the states, the product issuers and the firm itself – and it failed to train its registered representatives to apply all the suitability guidelines appropriately,” Brad Bennett, FINRA Executive Vice President and Chief of Enforcement said in a statement Monday.

Because of these supervisory lapses, FIRNA found at least one broker, Gary Chackman, was able to take advantage of the system. The regulator’s investigation revealed that Chackman entered false client information and processed alternative investments that far exceeded the firm’s concentration guidelines without detection.

Weinberger said Monday when the firm became aware of misconduct by the referenced financial advisor in his non-traded REIT transactions, LPL promptly terminated him. FINRA barred Chackman from the industry in December.

In Monday’s settlement, LPL neither admitted nor denied the charges. Weinberger said that beginning in 2012, LPL began a rigorous review of the firm’s supervisory policies and procedures related to alternative investment product sales, including non-traded REITs. “We believe that the enhancements we have since made significantly strengthen our ability to review the suitability of these transactions and ensure that sales of these products in the future comply with all applicable requirements,” she said. 


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