LPL Beefing Up Compliance In Wake of Massachusetts Lawsuit

Monday, January 28th, 2013

According to a report in the Investment News, LPL has told its 13,000 registered reps and investment advisers that it is cracking down on sales of leveraged, inverse and monthly reset mutual funds.

As of April 1, LPL reps no longer can source those kinds of mutual funds directly from a fund sponsor such as ProFund Advisors LLC or Rydex Funds. Instead, those orders must be directed through LPL’s broker-dealer, undoubtedly giving the company more control over the flow of such orders.

Leveraged and inverse mutual funds are nontraditional investments and can either move in the opposite direction of a market or index, boost the way the market moves, or both. The North American Securities Administrators Association in 2009 included leveraged exchange-traded funds among its top 10 investor traps, while the Securities and Exchange Commission and the Financial Industry Regulatory Authority Inc. at the same time issued alerts to investors warning about the risks of such funds.

LPL already prohibits the sale of ETFs, exchange-traded notes and mutual funds that are more than two times leveraged, meaning investors see double the daily gains or losses created by the investments. Over the past few years, securities regulators have been closely watching broker-dealers’ sales of such leveraged products, particularly ETFs.

One problem has been that some reps and investors do not understand that leveraged ETFs reset daily and are not securities that benefit from a “buy and hold” strategy.

Indeed, securities regulators recently have taken action against firms for sales of leveraged and inverse-action ETFs. Last May, Finra ordered broker-dealers of four major banks, Wells Fargo & Co., Citigroup Global Markets Inc., Morgan Stanley and UBS Financial Services Inc., to pay $9.1 million in fines and restitution for selling such funds “without reasonable supervision and for not having a reasonable basis for recommending the securities.”

Is LPL’s move to stop sales of such leveraged funds directly from a fund sponsor an indicator that broker-dealers could face more scrutiny of sales of such products? Or is it a reaction to the recent lawsuit the Massachusetts Securities Division filed against the firm involving nontraded real estate investment trusts (nontraded REITs)

In December, the Massachusetts Securities Division sued LPL alleging the firm failed to supervise registered representatives who sold nontraded REITs in violation of both state limitations and the company’s rules.

Massachusetts regulators also charged the company with dishonest and unethical business practices. The state’s charges stemmed from the sale of $28 million in nontraded REITs to almost 600 clients between 2006 and 2009.

Charges included sales made in violation of Massachusetts’ 10% concentration limits, prospectus requirements and LPL compliance practices.

The White Law Group continues to investigate FINRA arbitration claims involving the improper sale of nontraded REITs, leveraged and inverse mutual funds, or other nontraditional investments.

If you were recommended one of these products by either LPL or another broker dealer and suffered losses, please call the securities attorneys of The White Law Group at 312/238-9650 for a free consultation.

The White Law Group is a national securities fraud, securities arbitration, and investor protection law firm with offices in Chicago, Illinois and Boca Raton, Florida.

For more information on The White Law Group, visit http://www.whitesecuritieslaw.com.

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