LPL Financial today apologized for its "lapse of oversight" for 35 e-mail system failures that led to a $7.5 million fine imposed by the Financial Industry Regulatory Authority and a $1.5 million fund being established to compensate brokerage customers.

Finra announced today that it fined LPL Financial $7.5 million for 35 separate, significant e-mail system failures, which prevented LPL from accessing hundreds of millions of e-mails and reviewing tens of millions of other e-mails. Additionally, LPL made material misstatements to Finra during its investigation of the firm's e-mail failures, Finra said. LPL was also ordered to establish a $1.5 million fund to compensate brokerage customer claimants potentially affected by its failure to produce e-mail.

As part of the settlement, LPL neither admitted to nor denied the charges, but consented to the entry of Finra's findings.

As LPL rapidly grew its business, the firm failed to devote sufficient resources to update its e-mail systems, which became increasingly complex and unwieldy for LPL to manage and monitor effectively, Finra said. The firm was well aware of its e-mail systems failures and the overwhelming complexity of its systems, Finra added.

"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 e-mails. This case sends a strong message to firms to make sure your business does not outgrow your compliance systems," said Brad Bennett, Finra's executive vice president and chief of enforcement.

Finra found that from 2007 to 2013, LPL's e-mail review and retention systems failed at least 35 times, leaving the firm unable to meet its obligations to capture e-mail, supervise its representatives and respond to regulatory requests. Because of LPL's numerous deficiencies in retaining and surveilling e-mails, it failed to produce all requested e-mail to certain federal and state regulators and Finra, and also likely failed to produce all e-mails to certain private litigants and customers in arbitration proceedings, as required, says Finra.

Finra gave these examples of how LPL failed with its e-mail system:

•  Over a four-year period, LPL failed to supervise 28 million "doing business as" (DBA) e-mails sent and received by thousands of representatives who were operating as independent contractors.
•  LPL failed to maintain access to hundreds of millions of e-mails during a transition to a less expensive e-mail archive, and 80 million of those e-mails became corrupted.
•  For seven years, LPL failed to keep and review 3.5 million Bloomberg messages.
•  LPL failed to archive e-mails sent to customers through third-party e-mail-based advertising platforms.

In a statement issued today, LPL Financial Holdings Inc., parent company of LPL Financial, said in September 2011, it reported to Finra issues relating to the surveillance and retention of e-mails. "We cooperated fully with Finra throughout its ensuing investigation. We recognize the importance of having effective policies, procedures and systems to review and retain e-mails, and we very much regret our lapse of oversight. We have undertaken a comprehensive redesign of our e-mail systems and associated compliance policies and procedures, and have engaged independent experts to assess and validate our approach," the company said.

In a January 2012 letter 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, Finra said. The letter stated that there weren't any "red flags" suggesting any issues with DBA e-mail accounts when, in fact, there were numerous red flags related to the supervision of DBA e-mails that were known to many LPL employees, Finra maintains.
 
In addition, LPL likely failed to provide e-mails to certain arbitration claimants and private litigants, Finra said, and LPL will notify eligible claimants by letter within 60 days from the date of the settlement and the firm will deposit $1.5 million into a fund to pay customer claimants for its potential discovery failures.

Customer claimants who brought arbitrations or litigations against LPL as of Jan. 1, 2007, and which were closed by Dec. 17, 2012, will receive, upon request, e-mails that the firm failed to provide them, Finra said. Claimants will also have a choice of whether to accept a standard payment of $3,000 from LPL or have a fund administrator determine the amount, if any, that the claimant should receive depending on the particular facts and circumstances of that individual case. Maximum payment in cases decided by the fund administrator cannot exceed $20,000. If the total payments to claimants exceed $1.5 million, LPL will pay the additional amount.