LPL Financial fined $11.7 million for ‘widespread supervisory failures’

FINRA said the firm failed to properly supervise sales of complex products, including certain ETFs, variable annuities and non-traded REITs

May 6, 2015

The Financial Industry Regulatory Authority Inc. ordered LPL Financial to pay $11.7 million in fines and restitution for what it deemed “widespread supervisory failures” related to sales of complex products, according to a settlement letter released Wednesday.

From 2007 to as recently as April, LPL failed to properly supervise sales of certain investments, including certain exchange-traded funds, variable annuities and nontraded real estate investment trusts, and also failed to properly deliver more than 14 million trade confirmations to customers, according to FINRA. LPL, for example, did not have a system in place to monitor the length of time customers held securities in their accounts or to enforce limits on concentrations of those complex products in customer accounts, FINRA said.

The systems that LPL had in place to review trading activity in customer accounts were plagued by “multiple deficiencies,” FINRA said. The firm failed to generate proper anti-money laundering alerts, for instance, and did not deliver trade confirmations in 67,000 customer accounts, according to the settlement letter. The regulator also dinged the firm for failing to supervise advertising and other communications, including brokers’ use of consolidated reports. The penalty includes a $10 million fine and restitution of $1.7 million to customers who were sold certain ETFs. FINRA said the firm may pay additional compensation to ETF purchasers “pending a review of its ETF systems and procedures.”

“LPL’s supervisory breakdowns resulted from a sustained failure to devote sufficient resources to compliance programs integral to numerous aspects of its business,” said Brad Bennet, FINRA’s chief of enforcement, in a statement. “With today’s action, FINRA reaffirms that there is little room in the industry for lax supervision and that it will not hesitate to order firms to review and correct substandard supervisory systems and controls, and pay restitution to affected customers.”

LPL consented to the fine without admitting or denying the charges. The fine is the latest in a string of regulatory actions that have plagued the firm in the past year. At the end of October, CEO Mark Casady apologized to shareholders for taking so long to straighten out its compliance issues, with the company taking a $23 million charge to resolve yet undisclosed regulatory issues. A spokesman for the firm, Brett Weinberg, said that this fine was anticipated and is covered as part of that amount. The firm also agreed to conduct a written review to improve its supervisory systems as part of the settlement.

“LPL has made a long-term commitment to rebuilding its risk management and compliance infrastructure, and this resolution is a significant step in that process,” Mr. Weinberg said in a statement. “The substantial and ongoing investments made by LPL in our legal, risk management, compliance and other control functions reflect that this is a top priority for the company.”

Brokers get a mixed review on how they treat older investors

More than a third of brokerage firms examined by regulators made one or more potentially unsuitable recommendations of variable annuities to senior investors, a report issued Wednesday found.

The greatest issue regarding these sales was whether it was appropriate to exchange variable annuity contracts in light of the fees incurred, according to the report on the treatment of senior investors to the Securities and Exchange Commission and the Financial Industry Regulatory Authority Inc., the self-regulator of brokers.

Firms generated the most revenue from seniors by selling open-end mutual funds, variable annuities, equities, fixed-income investments, unit investment trusts and exchange-traded funds, nontraded real estate investment trusts, alternative investments and structured products, in that order.


Staff from the SEC and Finra analyzed examinations of 44 broker-dealers in 2013, looking at the types of investments purchased by firms’ senior clients, the training financial professionals who handle aging clients receive and the marketing aimed at older investors.

“It is imperative that firms are recommending suitable investments and providing proper disclosures regarding the related terms and risks,” said Andrew Bowden, director of the SEC’s Office of Compliance Inspections and Examinations.

About 13% of U.S. residents are at least 65 years old, or about 41 million people, according to U.S. Census Bureau data. That number is projected to jump to 79 million by 2040.

“The culture of compliance at firms is key to ensuring that seniors receive suitable recommendations and proper disclosures of the risks, benefits and costs of any investments they are purchasing,” said Susan Axelrod, Finra’s executive vice president of regulatory operations.

The most common complaints among senior investors were poor service and high fees. Instances of misrepresentation, unsuitable investments, churning and bad advice also were reported, but less so, the report said.

One senior investor alleged his investment account was churned and the broker traded in his account without permission from 2007 until 2011, according to the report.


Many of the firms scored well on certain metrics.

Three quarters of the firms were incorporating training specific to senior investors and had special senior investment precautions, the report said. Many set 70 as the age those initiatives kicked in, although some firms used 60 as the age threshold. The report didn’t indicate either was preferred.

About 89% of firms made appropriate disclosures to senior investors, even though the authors of the report said “it is unclear how well investors understand the disclosures they receive on recommended securities.”

Protecting seniors from elder financial abuse has been a high regulatory priority in recent years, but the regulators completed this examination review because of fears the low-interest-rate environment might lead brokers to recommend “riskier and possibly unsuitable securities to senior investors looking for higher returns,” the regulators said in a joint release.

Boston RIA hit with $48 million arbitration award

A Boston investment advisory firm and its managing partner have been ordered to pay a $48 million arbitration award to clients over a series of private investments in a company that owned a Polish tobacco company and patents on a cigarette filter that it claimed would revolutionize the tobacco industry.

According to the arbitration award, which was decided by one arbitrator, Philip Cottone, and issued Tuesday by the American Arbitration Association, Family Endowment Partners and its managing partner, Lee Weiss, breached their fiduciary duty when advising the clients, James and Jane Sutow.

The Sutows brought their claim against Family Endowment Partners, which has $334.6 million in assets under management, and Mr. Weiss in July 2013 regarding over $20 million in investments recommended by the firm and Mr. Weiss. The Sutows alleged that the investment recommendations were grossly negligent and unsuitable, and involved the sale of unregistered securities based on fraudulent and material misstatements, as well as the failure by the firm and Mr. Weiss to disclose their interests in the recommendations, according to the award.

“It is overwhelmingly clear to me, from listening to the testimony in this case, largely from Mr. Weiss himself, from reading the exhibits, and listening to the testimony of three qualified and credible experts that [the firm and Mr. Weiss] did breach those [fiduciary] duties, in almost every way,” according to the award.

Family Endowment Partners and Mr. Weiss initially recommended investments related to a Polish state tobacco distribution company that had been privatized and offered for sale three times by the government before it was bought by Biosyntec Polska, the company in which the Sutows invested $9 million from 2010 to 2012, according to the award.

The head of the group that bought Biosyntec Polska, Iman Emami, was “a longtime acquaintance of Mr. Weiss” and “held patents on a cigarette filter that was supposed to revolutionize the tobacco business by using extract of rosemary to eliminate 80% of the free radicals in cigarette smoke,” according to the award. Investments were made in companies related to Biosyntec, according to the award. “None of these investments were backed by offering documents or information that gave (the Sutows) full and fair disclosure of all material facts, or anything close to that.”

According to the award, Mr. Weiss testified in the arbitration hearing that he believed in Biosyntec and its future and told the Sutows he did so. However, he was uncertain as to what information he gave them about the cigarette investments because he kept no record, testifying that he told them orally what they needed to know.

The Polish tobacco distribution company was said to be “technically insolvent” by one of the Sutows’ expert witnesses, according to the award.

“An additional glaring breach of fiduciary duty was the failure by the respondents to tell (the Sutows) anywhere in writing that Mr. Weiss personally had what he characterized as a ‘performance interest’ in the success of Biosyntec prior to the time of the first investment” in the company by Sutows, according to the award. Mr. Weiss “estimated the value of that interest on forms to his banker in January 2011 to be in the range of $14 million to $25 million,” according to the award.

Along with the investments in Biosyntec, in 2012 and 2013, the Sutows invested another $9.7 million in two funds created and managed by Family Endowment Partners and Mr. Weiss. They made a redemption request on one fund at the end of 2013 and had 90% of that $5.1 million investment returned, according to the award.

The Sutows were awarded $17.4 million actual damages, almost $1 million in legal fees and treble damages of $30 million, which were awarded under Pennsylvania law, according to the award.Family Endowment Partners had an office in Pennsylvania that worked with the Sutows, and the Sutows sought damages under the Pennsylvania Unfair Trade Practices and Consumer Protection Law.

Mr. Weiss did not return phone calls Wednesday afternoon and Thursday morning seeking comment.

Prior to founding Family Endowment Partners in 2007, Mr. Weiss worked at Fidelity Investments, according to his BrokerCheck profile with the Financial Industry Regulatory Authority Inc. At the time of his departure, he was the president of Fidelity’s family office business, according the Family Endowment Partners’ website.

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