According to FINRA, the reason for the fine was 35 separate, significant email system failures, which prevented LPL from accessing hundreds of millions of emails and reviewing tens of millions of other emails. Additionally, LPL made material misstatements to FINRA during its investigation of the firm’s email failures. LPL was also ordered to establish a $1.5 million fund to compensate brokerage customer claimants potentially affected by its failure to produce email.
As LPL rapidly expanded its business, FINRA said, the firm failed to devote sufficient resources to updating its email systems, which became increasingly complex and unwieldy to manage and monitor effectively. The firm was well aware of its email systems failures and the overwhelming complexity of its systems.
FINRA’s Department of Member Regulation and Department of Enforcement conducted an investigation and found that from 2007 to 2013, LPL’s email review and retention systems failed at least 35 times, leaving the firm unable to meet its obligations to capture email, supervise its representatives and respond to regulatory requests. Because of LPL’’s numerous deficiencies in retaining and surveilling emails, it failed to produce all requested email to certain federal and state regulators and FINRA, and also likely failed to produce all emails to certain private litigants and customers in arbitration proceedings, as required.
“This case sends a strong message to firms to make sure your business does not outgrow your compliance systems,” said Brad Bennett, executive vice president and chief of enforcement. “As LPL grew, it did not expand its compliance and technology infrastructure; and as a result, LPL failed in its responsibility to provide complete responses to regulatory and other requests for emails,” Bennett said.
Some examples of the email failures include:
- Over a four-year period, LPL failed to supervise 28 million “doing business as” (DBA) emails sent and received by thousands of representatives who were operating as independent contractors;
- LPL failed to maintain access to hundreds of millions of emails during a transition to a less expensive email archive, and 80 million of those emails became corrupted;
- For seven years, LPL failed to keep and review 3.5 million Bloomberg messages; and
- LPL failed to archive emails sent to customers through third-party, email-based advertising platforms.
In addition, LPL made material misstatements to FINRA concerning its failure to supervise 28 million DBA emails. In a January 2012 letter to FINRA, LPL inaccurately stated that the issue had been discovered in June 2011 even though certain LPL personnel had information that would have uncovered the issue as early as 2008. Moreover, the letter stated that there weren't any “red flags” to suggest any issues with DBA email accounts when, in fact, there were numerous red flags related to the supervision of DBA emails that were known to many LPL employees.
FINRA also noted that LPL likely failed to provide emails to certain arbitration claimants and private litigants. LPL will notify eligible claimants by letter within 60 days from the date of the settlement, and the firm will deposit $1.5 million into a fund to pay customer claimants for its potential discovery failures. Customer claimants who brought arbitrations or litigations against LPL as of Jan. 1, 2007, and which were closed by Dec. 17, 2012, will receive, upon request, emails that the firm failed to provide them. Claimants will also have a choice of whether to accept a standard payment of $3,000 from LPL or have a fund administrator determine the amount, if any, that the claimant should receive depending on the particular facts and circumstances of that individual case. Maximum payment in cases decided by the fund administrator cannot exceed $20,000. If the total payments to claimants exceed $1.5 million, LPL will pay the additional amount.
In concluding this settlement, LPL neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA’s BrokerCheck, which FINRA makes available for free online. Copies of this action and other disciplinary documents in FINRA’s are available at the Disciplinary Actions Online database.