4:58 p.m. | Updated
One of the nation’s largest brokerage firms, LPL Financial, is paying $7.5 million to settle accusations that it made misstatements to regulators and failed to properly supervise its brokers’ communications.
LPL has grown into a brokerage powerhouse over the last decade by providing financial services to clients with lower incomes and outside the major cities, who have often been overlooked by the large brokerage firms.
The Financial Industry Regulatory Authority, which is financed by the industry, said Tuesday that LPL failed to properly monitor the e-mails of its far-flung network of brokers over several years. While LPL did not admit or deny the charges, it will pay Finra $7.5 million and put another $1.5 million aside to pay customers who may have been hurt.
LPL, with headquarters in San Diego and Boston, has been fined by several state and national regulators in recent years. Critics have said that the problems have been a result of the firm’s decentralized business model and the difficulty of supervising the company’s fast-growing network of over 13,000 brokers, which ranks it behind only Merrill Lynch, Morgan Stanley and Wells Fargo.
The chief of enforcement at Finra, Brad Bennett, said in a statement on Tuesday that, “as LPL grew, it did not expand its compliance and technology infrastructure.â€
The charges carry particular significance for LPL because the company’s far-flung offices have forced it to rely heavily on electronic monitoring systems.
In a statement released Tuesday, LPL said “we very much regret our lapse of oversight.â€
“We have undertaken a comprehensive redesign of our email systems and associated compliance policies and procedures, and have engaged independent experts to assess and validate our approach,†the statement said.
Finra said that LPL had numerous lapses in its efforts to monitor and retain e-mails. That resulted in problems like 80 million corrupted e-mails, and the failure to review 28 million messages sent by LPL brokers working as independent contractors.
Once the problems were discovered, Finra said that LPL made misstatements about the extent to which employees of the firm knew about the issues.
LPL has set itself apart in the industry by hiring its brokers as contractors rather than employees. This has been attractive for brokers by allowing them to keep more of their commissions. It has also resulted in LPL expanding into areas of the country that cannot support large brokerage operations. But analysts have said that the scattered offices can be harder to monitor.
Ealier this year, LPL paid Finra $400,000 to settle charges that it failed to properly deliver information on mutual funds to its clients. Four other firms were fined at the same time, but LPL paid more than twice as much as any other firm. A month later, LPL agreed to pay $2.5 million after the Massachusetts accused the firm of improperly selling complex real estate investments to unsophisticated investors.
Before the Finra fine was announced this week, LPL executives were promoting their efforts to revamp their compliance systems. The firm’s president, Robert Moore, said in an interview with Reuters published on Monday that LPL will be adding more dedicated compliance officers closer to local offices.
“It comes at a cost that we have to find a way to absorb,†Mr. Moore told Reuters.
This post has been revised to reflect the following correction:
Correction: May 21, 2013
Because of an editing error, an earlier version of this article misstated the date of a Reuters interview with LPL Financial's president, Robert Moore. The interview was on Friday, not Monday. The article was published by Reuters on Monday.
