LPL Ends Broker Self-Supervision

One of the basic tenets of securities industry regulation is that brokers, the individuals who are actually interacting with clients on a day to day basis and placing trades for those clients, are supposed to be supervised in order to help ensure that the brokers comply with the relevant laws and regulations.  While the system is by no means perfect, it is still a significant protection that customers are supposed to have to help shield them from securities fraud.  LPL Financial LLC (“LPL”), one of the largest brokerage companies, and the largest independent brokerage company, in the world is finally supposed to enact meaningful supervision.

Currently, LPL operates with all of its brokers classified as “independent contractors.”  While that arrangement is rather common in the securities industry, LPL went one further and permitted these independent contractors to act as their own supervisors as well.  Many of the brokers employed by LPL are self-employed one man shops, either as a result of their own desire to do business that way or because no major brokerage firm would hire them.  Essentially, these one man shops were permitted to hold two different employment titles: (1) registered representative (broker), and (2) supervisor.  So the broker was supposed to enact trades for his clients, then go back through and review those trades to make sure that he had acted appropriately with regard to that trade.  The problems with this are obvious, as has been the results.  

LPL has been the subject of numerous lawsuits and regulatory complaints noting the lack of supervision of LPL’s brokers.  Just recently, LPL agreed to pay close to $3 million for failing to properly supervise its brokers in the sale of non-traded real estate investment trusts (REITs).  That number later increased to almost $5 million when the regulators started reviewing more years of REIT sales.  Just a few months ago LPL was also fined $7.5 million for failing to properly manage firm emails, which is currently on the books as the largest fine ever levied for violations of e-mail related compliance requirements.  

As a result of these problems, LPL has recently given public statements that it is getting rid of the ability of its brokers to act as their own supervisors.  Instead, brokers who had formerly worked that way have three choices.  First, they can move under the supervision of an office of supervisory jurisdiction (“OSJ”), which is essentially a regional compliance/supervisory office responsible for all associated reps in the area.  Second, they can agree to be supervised directly by LPL’s home office.  Third, they can leave and try to get hired on someplace else.  None of these options are going to be particularly attractive to the brokers who have gotten used to doing business unsupervised.

If the brokers choose to be supervised directly by LPL’s home office, they will end up paying around a $5,000 a year fee increase that they owe the firm.  If the brokers choose to be supervised under an OSJ, they will end up paying somewhere between 4-30% of their gross generation of fees and commissions.  Moving elsewhere might not be any easier, as the number of firms which permit this sort of self-supervision is getting to be few and far between, so finding a similar arrangement elsewhere may not be possible.  

Of course, all of this is nothing but good for LPL customers.  The whole reason that these changes are coming is that LPL customers have been repeatedly mistreated and improperly advised, and, without proper supervision, their brokers got away with misconduct for much longer than they would have had they been properly supervised.  As a result, many customers suffered tremendous losses that were entirely avoidable.  
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