FINRA Fines Firm for Lack of Supervisory Procedures

By November 28, 2017FINRA

Today we are looking at a recent fine handed down by FINRA to a firm that failed to have the proper supervisory procedures in place.  In this case, the firm was fined not just for a lack of supervisory procedures, but also for insufficient procedures.  Notice how FINRA looked not only at the procedures themselves, but also at their effectiveness.

LPL Financial LLC was fined $950,000 by FINRA for supervisory deficiencies related to the sales of alternative investment products, including non-traded real estate investment trusts (REITs), oil and gas partnerships, business development companies (BDCs), hedge funds, managed futures and other illiquid pass-through investments.

FINRA found that from Jan. 1, 2008, to July 1, 2012, LPL failed to adequately supervise the sales of alternative investments that violated 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to review whether an investment complied with suitability requirements, relying on information that was at times outdated and inaccurate, FINRA said. 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. LPL also did not adequately train its supervisory staff to analyze state suitability standards as part of their suitability reviews of alternative investments, according to FINRA.

Brad Bennett, FINRA executive vice president and chief of enforcement, said, “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 – and it failed to train its registered representatives to apply all the suitability guidelines appropriately.”

As part of the sanction, LPL must conduct a comprehensive review of its policies, systems, procedures and training, and remedy the failures. Many alternative investments, such as REITs, set forth concentration limits for investors in their offering documents. In addition, certain states have imposed concentration limits for investors in alternative investments. LPL also established its own concentration guidelines for alternative investments, according to FINRA.

If LPL had put the proper Supervisory procedures in place and had evaluated their effectiveness, these violations, and the subsequent fines, could have been avoided.  Does your firm have effective Supervisory procedures in place to protect you and your clients?  Contact the professionals at Cobia Compliance today to take the first step in ensuring you will be ready when you find yourself in FINRA’s crosshairs.



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