In settling the matter, LPL Financial neither admitted nor denied FINRA’s charges, but consented to findings that it did not adequately supervise the sale of certain alternative investments, including non-traded real estate investment trusts (REITs), oil and gas partnerships, business development companies, hedge funds, managed futures and other illiquid pass-through investments.
As part of the sanction, LPL must conduct a comprehensive review of its policies, systems, procedures and training, and remedy any failures—especially those related to how the firm tracks and addresses portfolio concentration limits for alternatives in client portfolios.
FINRA points out that many alternative investments, such as REITs, set forth concentration limits for investors in their offering documents. In addition, certain states have imposed additional concentration limits for investors in alternative investments. LPL also established its own concentration guidelines for alternative investments.
However, FINRA found that from January 1, 2008, to July 1, 2012, LPL failed to adequately supervise the sales of alternative investments that violated these concentration limits. At first, LPL used a manual process to review whether an investment complied with suitability requirements, relying on information that was at times outdated and inaccurate. The firm later implemented an automated system for review, but that database contained flawed programming and was not updated in a timely manner to accurately reflect suitability standards.
FINRA says LPL also did not adequately train its supervisory staff to analyze state suitability standards as part of their suitability reviews of alternative investments.
Brad Bennett, FINRA executive vice president and chief of enforcement, explains that, in order to sell alternative investments, a broker/dealer must tailor its supervisory system to these products.
“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,” Bennett says. “And it failed to train its registered representatives to apply all the suitability guidelines appropriately.”
Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA’s BrokerCheck. Investors can access BrokerCheck for free at www.finra.org/brokercheck or by calling 800-289-9999.
Investors may find copies of this disciplinary action as well as other disciplinary documents in FINRA’s Disciplinary Actions Online database.