FINRA Fines LPL for Failure to Supervise on Complex Products

What are non-traditional exchange-traded funds (ETFs) and non-traded real estate investment trusts (REITs)? Why are independent broker dealers selling these complex products without proper supervision? FINRA wants to know and just slammed LPL Financial for doing such a thing.

This week, FINRA censured and fined LPL $10 million for broad supervisory failures in the sale of complex products such as leveraged ETFs and non-traded REITS. It also ordered LPL to pay an additional $1.7 million in restitution to certain customers who bought non-traditional ETFs.

This is a watershed moment for these and other complex products. First, LPL has over 14,000 brokers nationwide and is by a wide margin the largest independent broker dealer in the U.S. (Lincoln Financial Network with over 8,000 brokers is second). The biggest independent broker-dealer getting hit like this by FINRA is the equivalent of FINRA fining the old Merrill Lynch in wire house terms.

Second, as many investors struggle for yield in this low yield environment, brokers are pitching more complex products to investors such as leveraged ETFs and non-traded REITS. We will be adding significant content to our website on these products soon. The problems with them are that they are very complicated, expensive and often riskier than how they are being marketed. FINRA’s fine of LPL marks the beginning of what will likely be a string of problems for broker-dealers related to these products.

FINRA found that LPL did not enforce concentration limits on these products and failed to ensure that its brokers were adequately trained on the products’ risks. Amazingly, FINRA found that LPL failed to deliver over 14 million trade confirmations in 67,000 customer accounts.

As is typical, LPL neither admitted or denied FINRA’s charges. However, LPL did consent to the entry of FINRA’s findings.

Rich, Intelisano & Katz, LLP represents investors in complex product disputes. If you have any questions regarding them, please contact us.

Here is a link to FINRA’s press release regarding the fine.

https://www.finra.org/newsroom/2015/finra-sanctions-lpl-117-million-widespread-supervisory-failures
Here is a link to a WSJ article on the topic.

http://www.wsj.com/articles/lpl-financial-to-pay-11-7-million-to-settle-finra-charges-1430921757