The Financial Industry Regulatory Authority has fined
LPL Financial $7.5 million for email system failures, and ordered the firm to set up a $1.5 million fund to compensate customers who were affected by the flaws.

The financial regulator says that between 2007 and 2013 LPL’s email review and retention systems failed at least 35 times, leaving the firm in a position where it wasn’t meeting its obligations to capture email, supervise its representatives and respond to regulatory requests.

“Because of LPL's numerous deficiencies in retaining and surveilling emails, it 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, as required,” FINRA said in a statement.

FINRA highlighted LPL’s quick expansion, saying that it did not upgrade its technology and compliance infrastructure fast enough.

It listed specific failures as: failing to supervise “doing business as” emails sent and received by representatives who were operating as independent contractors; failing to maintain access to hundred of millions of emails during a transition to a new, cheaper email system; failing to keep and review 3.5 million Bloomberg messages, and failing to archive emails sent to customers though a third-party email-based advertising platform.

"In September 2011, we reported to FINRA issues relating to the surveillance and retention of emails. We cooperated fully with FINRA throughout its ensuing investigation,” LPL Financial Holdings, the parent firm, said in a statement yesterday.  

“We recognize the importance of having effective policies, procedures and systems to review and retain emails, and we very much regret our lapse of oversight. We have undertaken a comprehensive redesign of our email systems and associated compliance policies and procedures, and have engaged independent experts to assess and validate our approach,” the firm said.

The authority says LPL made “material mis-statements” to it during its investigation, potentially obscuring when the DBA issue had been discovered and denying there were warning signs to employees.

In response, LPL said that FINRA’s actions had revealed that certain personnel had information that would have uncovered the issue to senior management earlier, but that it has taken steps to train employees on escalating compliance issues.

LPL will notify eligible claimants for the compensation fund within 60 days of the settlement, and if claims exceed $1.5 million LPL will pay the additional.