Securities Lawyers Blog
LPL Financial was recently fined $2 million and ordered to pay $820,000 in restitution, for violations pertaining to variable annuity exchanges. This settlement, which was reached with the Illinois Securities Department, resulted from LPL’s inadequate maintenance of books and records with regards to documenting 1035 exchanges. A 1035 Exchange is a tax-free exchange of an existing annuity contract for a new one. In order for the new contract to qualify as a Section 1035 Exchange, the policyholder must have exchanged his or her existing contract for an equivalent new contract. The annuitant or policyholder must also remain the same.
According to LPL’s BrokerCheck file, LPL “failed to enforce its supervisory system and procedures in connection with the documentation of certain salespersons’ variable annuity exchange activities.” LPL has indicated that it will seek to enhance its procedures relating to surrender charges that often result from variable annuity exchange transactions. This, LPL believes, would ensure accuracy in their books and records along with client disclosures.
The product at issue was variable annuities, which have been closely watched by regulators dues to the complexity of the product and high fee structures. Elderly investors have often been sold variable annuities, when they were entirely unsuitable, just so that brokers could earn increased commissions. Regulators have paid especially close attention to those advisors who have switched their clients from one variable annuity to another, just to enhance their commissions.
Prior to the current violation, LPL had previously run into trouble with variable annuities. In 2010, the FINRA fined LPL $175,000 for failing to adequately supervise its advisers when they moved clients out of existing variable annuities into new ones, a charge similar to the one levied by Illinois.
Variable annuities are not the only product that has brought LPL trouble, as LPL has already been scrutinized for some of its sales of other investments products. For example, in 2013, LPL was investigated for improprieties relating to the sales of non-traded real estate investment trusts (REITs). LPL settled with the state of Massachusetts for over $2 million and a $500,000 fine. The Financial Industry Regulatory Authority (FINRA) also fined LPL for multiple email failures in connection with the non-traded REITS.
In response to the slew of regulatory violations, LPL has allegedly agreed to provide more documentation and background to regulators and is attempting to implement an automated process to accommodate additional regulator requests.
The attorneys at Gana Weinstein LLP are experienced in handling cases dealing with variable annuities, REITS, and other unique investments, which are inappropriate for many investors. Our consultations are free of charge and we are only compensated if you recover.