Israels & Neuman PLC Investigation Continues:  LPL FINANCIAL TO PAY $10 MILLION TO SETTLE ALLEGATIONS

We are currently investigating allegations made against LPL Financial, a Boston, Massachusetts-based securities brokerage firm.  FINRA (the Financial Industry Regulatory Authority) brought a regulatory action against LPL financial, making numerous allegations regarding its conduct, including failures to supervise the sales of non-traditional ETFs (inverse or leveraged ETFs), variable annuities, non-traded REITs (real estate investment trusts), mutual fund switches, and the sales of Class C mutual fund shares.  Most of this conduct took place between 2007 and up to April 2015.  To settle these allegations, LPL Financial agreed to pay a $10,000,000 fine and at least $1.66 million in restitution to its customers who invested in non-traditional ETFs.

ETFs

ETFs (or Exchange Traded Funds) have become increasingly popular over the last 15 years.  ETFs are typically used to track and replicate the performance of an index, such as the S&P 500, the Russell 2000, or the Dow Jones.  ETFs are popular, because investors can invest in a basket of securities that provides diversification but with the simplicity of being a single stock.

In recent years, many companies have also created leveraged or inverse ETFs.  Leveraged ETFs try to replicate the performance of a particular index, but attempt to replicate the performance by doubling or even tripling the index.  As an example, the Proshares Ultra Russell 2000 ETF seeks to double the performance of the Russell 2000 Index.  Inverse ETFs also try to replicate the opposite (or even multiple opposites) of a particular index.  For example, Ultrashort QQQ Shares seeks a return of two times the inverse (-2x) of the daily performance of the NASDAQ-100 Index. Leveraged and inverse ETFs can be useful investment tools for investors seeking intra-day trading.

The regulators and others have long-warned the securities industry about the dangers of inverse and leveraged ETFs.  These are designed to be day-trading vehicles, but often financial advisors recommend holding these ETFs in an investor’s accounts for weeks or even months.  FINRA alleged that numerous clients of LPL Financial held these ETFs for periods longer than one day (sometimes longer than a year), but it had no adequate supervisory procedures in place to detect this.

FINRA has stated that “inverse and leveraged ETFs that are reset daily typically are unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets.”  See FINRA Regulatory Notice 09-31 at page 1.  This Notice reminds members who sell these products to “make every effort to familiarize themselves with each customer’s financial situation, trading experience, and ability to meet the risks involved with such products and to make every effort to make customers aware of the pertinent information regarding the products.”  Id. at 3, citing to NASD Notice To Members 05-26.

FINRA has punished other brokers and firms for using leveraged and inverse ETFs improperly.  In an action against Michael Venable, FINRA barred a broker from the industry for using unsuitable leveraged and inverse ETFs with his clients.  See In re Michael Douglas Venable.   FINRA also fined Citigroup, Morgan Stanley, UBS, and Wells Fargo a combined $9.1 million for sales of inverse and leveraged ETFs, in May 2012.

Non-Traded REITs

FINRA also sought to punish LPL Financial for its sale of non-traded REITs.  Non-traded REITs generally are illiquid products and can be high risk, speculative products.  As such, they are typically not suitable for many investors.

Class C Mutual Fund Shares

FINRA further alleged that LPL Financial its supervisory procedures with respect to the sale of Class C mutual fund shares were inadequate.  Specifically, FINRA alleged that the thresholds set by the firm to determine whether Class C shares were appropriate was too high to be effective.

FINRA alleged that LPL Financial failed to review problematic trades.  It also alleged that LPL’s electronic surveillance system failed to generate alerts that would have triggered supervisory review.

We currently and have previously represented numerous investors against LPL Financial.  While we have offices in Denver and the Seattle-area, we continue to represent investors throughout the country.  If you have lost money with LPL Financial in ETFs, non-traded REITs, variable annuities, or mutual funds, and want to hear about ALL legal options, please visit https://www.israelsneuman.com/ and go to our CONTACT page or call us at 720-599-3505.

Click to view:  LPL FINRA AWC 5.6.15