LPL Pays More to States, Doubles Down on Rollover Compliance
LPL Financial, which chalked up more than $75 million in fines and restitution orders from 2014 through 2016, moved more legal events to the front-burner this week.
The world’s biggest independent broker-dealer, which operates through a salesforce of more than 14,000 non-employee brokers, was ordered Thursday to pay Massachusetts $1 million for failing to supervise credit union-affiliated brokers.
On Wednesday, New Hampshire regulators said LPL will compensate state investors up to $8 million because of non-traded REIT sales practice violations that already cost the firm $750,000 in fines.
Earlier this week, LPL told its brokers that it is proceeding with requirements that will limit how they can reach out to investors and prospects regarding retirement account investments so that it can “appropriately manage risk” associated with the Department of Labor fiduciary rule scheduled to go into effect on June 9.
The DOL rule, as currently written, considers any communication suggesting a rollover from a 401(k) or other employer retirement plan to a broker-housed individual retirement account to be advice that would trigger fiduciary responsibilities, with potentially punitive consequences. LPL and the brokerage industry are most concerned about a best-interest contract they would have to sign that would allow IRA customers to sue over prudence and loyalty violations.
Many brokerages have halted plans on how to guide their brokers regarding rollover accounts, pending the outcome of a review of the DOL rule that the Trump administration has ordered. The rule would permit “educational” discussions about investments but require the contract if conversations veer into advice.
“LPL will continue to maintain an education-only policy when discussing with an investor a roll out of assets from a plan such as a 401(k) to an LPL IRA account or LPL-custodied retirement plan,” the firm told brokers in a memo this week, though it admitted that it is still trying to define the policy. “We are continuing to evaluate enhancements to appropriately manage risk and will be issuing additional guidance in the near future.”
The memo said that effective June 9 LPL will require brokers to retain formal “rationale” documents in their files to show that they have exercised prudence in opening new accounts, noting the firm has upgraded its ClientWorks software to build the function into the account opening process if they want to use it rather than create their own documents. In the short term, it is not requiring a “rollover rationale form” as part of brokers’ legal-protection armamentarium. The memo did not explain why, though the best-interest contract provisions of the fiduciary rule that includes lawsuit authorizations is not scheduled to become effective until January 2018.
LPL did not make a direct connection between its state regulatory settlements and its caution on the DOL fiduciary rule. In a separate memo brokers received this week, Andy Kalbaugh, divisional president for national sales, positioned LPL’s preparations for the rule as a distinguishing advantage.
“There’s been a lot of speculation about the future of the rule given the regulatory environment and political actions. While this has caused other companies to slow or even discontinue their work, we’ve remained steadfast and focused on our behind-the-scenes preparations so we could pivot to any outcome and position you for growth in this dynamic environment,” he wrote. “Disruption can open the door to earning new business while the unprepared flounder; we’re providing you with solutions so you are not only prepared, but can harness the opportunities ahead to enhance your client relationships and grow your practice.”
As for the state settlements, Massachusetts fined LPL $1 million for failing to supervise brokers who were based at Digital Federal Credit Union and gave the impression that they were selling securities as credit union employees. They participated in illegal securities sales contests, received other credit union- paid bonuses based on commissions, used “inconsistent and confusing” business cards branding themselves as DCU Financial employees and made misleading statements about how they were compensated.
“Credit union members are hard-working average investors who should not find themselves subject to these type of aggressive sales practices and misleading and confusing disclosures,” Secretary of State William Galvin said in a prepared statement.
LPL spokesman Jeff Mochal said the firm has made “a long-term commitment to enhancing our risk management and compliance structures” and is pleased to have resolved the matter. LPL executives have said that its credit union and small bank business is among its fastest-growing channels.
Under the New Hampshire agreement announced on May 3, LPL said it will offer state residents up to $8 million in remediation. People who sold their investments at a loss are likely to accept the offers, while some REIT holders with gains would be better off keeping the investments, said a person familiar with the settlement.
“We are pleased to have reached a final resolution with the State of New Hampshire Securities Bureau regarding this matter from 2015,” Mochal said. LPL has dedicated substantial resources to improving our processes and technology and enhancing our practices around the processing, sale, and supervision of complex products, and we believe these efforts will lower the firm’s risk profile and provide even greater consumer protection going forward.”
On a conference call with analysts last week, LPL said that its first-quarter regulatory compliance costs fell 16% to $5.3 million from the year-earlier period and predicted that total compliance expenses for 2017 will remain about flat with last year at about $17 million. Expenses related to compliance, supervisory and regulatory and legal issues were $34 million in 2015.
-Mason Braswell contributed to this story.
