LPL Financial Holdings Inc. has been fined $2 million by the Illinois Securities Department and ordered to pay of $820,000 in restitution to clients over failures related to recordkeeping and supervision of variable annuity sales.
LPL has been the target of a number of enforcement actions over the last few years. The most recent previous instance led to a FINRA fine of $950,000 in March for supervisory failures. Many of these actions have been regarding alternative investments, including variable annuities, REITs and similar products.
VAs have been a big seller for LPL, and for many other firms, despite the problems inherent in making sure they're suitable for buyers. So supervision and recordkeeping are very big deals, particularly in regards to the sale of VAs.
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While there are tax-free exchanges to move from one VA to another, there are other factors to consider, such as those mentioned in the consent order in the latest action against LPL. To wit: "Guarantees which have accrued might be forfeited when the existing contract is exchanged. Surrender charges payable to the issuer will apply if the investment is being surrendered within the surrender charge period. If the new annuity has higher annual fees and charges than the old annuity, returns may be reduced, dependent on many factors including new investment choices, benefits and riders. Additionally, a new surrender charge period is typically imposed."
With all those items to keep track of, LPL requires that advisors document that they have made all required disclosures to clients. This is done not just through codes that indicate the disclosures have been made, but also through detailed explanations of why the transaction was suitable and beneficial to the client.
Records, however, were sometimes complete and inaccurate, and supervision was inadequate, according to the authorities.
In addition to the fine and restitution, LPL has agreed to review its supervisory system and procedures and make changes regarding the training of personnel and the review of transactions, as well as beef up VA sales and exchange disclosures.
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