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April 19, 2014

Financial Industry Regulatory Authority (FINRA) Imposes $9 Million Penalty for Email Failures

FINRA announced that it fined brokerage firm LPL Financial LLC (LPL) $7.5 million for significant email system failures, which allegedly prevented LPL from "accessing hundreds of millions of emails and reviewing tens of millions of emails," and for making misstatements to FINRA. FINRA also ordered LPL to establish a $1.5 million fund to compensate brokerage customer claimants potentially affected by LPL's failure to produce email. LPL neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

Brad Bennett, Executive Vice President and Chief of Enforcement at FINRA, said, "As LPL grew, it did not expand its compliance and technology infrastructure; and as a result, LPL failed in its responsibility to provide complete responses to regulatory and other requests for emails. This case sends a strong message to firms to make sure your business does not outgrow your compliance systems."

FINRA found that from 2007 to 2013, LPL's email review and retention systems failed at least 35 times, leaving the firm unable to meet its obligations to capture email, supervise its representatives and respond to regulatory requests. Because of LPL's deficiencies in retaining and monitoring emails, FINRA determined that LPL failed to produce all requested email to certain federal and state regulators and FINRA, and also likely failed to produce all emails to certain private litigants and customers in arbitration proceedings.

LPL's registered representatives are independent contractors and many operate under one or more "doing business as" (DBA) names and use DBA email addresses in addition to an lpl.com email address for their business. FINRA found that LPL did not review 28 million DBA emails sent and received from thousands of representatives over a three-year period.

In addition, FINRA alleged that LPL made material misstatements to FINRA concerning its failure to supervise the DBA emails. According to FINRA, LPL inaccurately stated that the issue had been discovered in June 2011 even though certain LPL personnel had information that would have uncovered the issue as early as 2008. Moreover, LPL claimed that there were not any "red flags" suggesting any issues with DBA email accounts when, in fact, there were numerous red flags related to the supervision of DBA emails that were known to many LPL employees.

Ignites reports that more than half the participants in a recent survey said they had increased the resources -- both time and money -- allocated to e-mail compliance over the past year. In addition, half the survey participants expect to increase those resources in the next year. "E-mail challenges still face a lot of companies," says Stephen Marsh, CEO of Smarsh, the e-mail and social media archiving firm that conducted the survey. Smarsh surveyed 284 compliance professionals who have direct compliance supervision responsibilities at an array of financial services firms. The survey was conducted between January and March of 2013.

Sources: LPL to Pay $9 Million for Systemic Email Failures and for Making Misstatements to FINRA; LPL Fined $7.5 Million and Ordered to Establish $1.5 Million Fund to Compensate Affected Customers; FINRA News Release (May 21, 2013); Financial Industry Regulatory Authority Letter of Acceptance, Waiver and Consent No. 2012032218001 (May 21, 2013); Paula Vasan, Former SEC Official Joins LPL Financial, Financial-Planning.com (June 20, 2013); Beagan Wilcox Volz, Firms Boost Spending on E-Mail Compliance: Survey: Ignites (May 29, 2013).

Copyright © 2014 Godfrey & Kahn S.C.

About the Author

Christopher M. Cahlamer, Securities Law Attorney, Godfrey & Kahn law firm
Shareholder

Christopher Cahlamer is a shareholder in the Milwaukee office and a member of the firm's Securities Law Practice Group, where he practices in securities and investment management law, focusing on investment companies, investment advisers, new product development, SEC compliance and reporting obligations, mergers and acquisitions, and general corporate and fiduciary issues.

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About the Author

Carol A. Gehl, Securities Law Attorney, Godfrey & Kahn law firm
Shareholder

Carol Gehl is a shareholder and the team leader of the Securities Practice Group in the Milwaukee office.

Carol’s practice is focused on investment management entities, including mutual funds, hedge funds, investment advisers and broker-dealers throughout the nation. During the last number of years, Carol has facilitated the organization of numerous mutual funds, hedge funds and investment advisers; assisted in SEC and FINRA examinations of regulated entities; provided ongoing advice to mutual fund Boards of Directors; and assisted with several mergers of investment advisers...

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Susan Hoaglund, Investment Management Attorney, Godfrey Kahn law firm
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Susan Hoaglund is a member of the Investment Management Practice Group. Susan provides advice to investment advisers, investment companies, broker-dealers and banks regarding legal, regulatory and compliance matters.

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About the Author

Helge Lee, Securities Law Attorney, Godfrey Kahn law firm
Special Counsel

Helge Lee, a former senior executive and general counsel of several national and international mutual fund groups, advises mutual funds, investment advisers, independent directors and underwriters and selling brokers, and their respective legal and compliance staffs on all matters arising under the Investment Company Act of 1940, the Investment Advisers Act of 1940, the Securities Act of 1933 and the Securities Exchange Act of 1934.

During a thirty-year legal career Helge has acted as principal counsel in SEC, NASD and DOL compliance examinations and enforcement actions, closed-end...

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