The importance of having proper policies, procedures and controls in place to ensure your firm is in compliance before regulators come knocking cannot be overstated — and every few months it seems, an example finds its way into the news to underscore just why compliance is something that should never be brushed aside or ignored.
Take the recent twenty-six million dollar settlement by LPL Financial LLC for example, only the most recent broker-dealer to fall afoul of regulators. Though you can read the full text of LPL Financial’s $26 million settlement with state regulators, here are a few bullet points:
- LPL Financial sold unregistered, non-exempt securities, not purposefully, but through a series of systemic compliance failures
- LPL Financial is paying millions in penalties
- LPL Financial has ongoing litigation in California (the only state not to settle)
- LPL Financial also must repurchase those same securities with a 3% simple interest
The most painful lesson learned, is that some, if not all, of the violations could have been avoided had appropriate policies, procedures and controls been implemented. In fact, that is the main crux of the case brought against LPL by the state regulators and what caused LPL to unwittingly sell unregistered securities to clients.
Notably, at one point, LPL had retained third-party services as part of its efforts to achieve and maintain compliance with respect to state security registration requirements, but had later canceled the services. The state regulators said that in this regard, LPL had “failed to conduct appropriate and necessary due diligence regarding the retention, use, and subsequent cancellation of certain third-party services critical for compliance with state securities registration requirements.”
What can we learn from this? There are a few major takeaways for broker-dealers and investment advisers of any size.
Compliance Can be Overwhelming and Subtle - Expertise is Indicated
As with the majority of cases like this, the firm was acting in good faith to the best of its knowledge — it simply made mistakes. Some might argue that these were big mistakes — but the manner by which LPL got to this point is meaningless when regulators start raining down penalties.
Compliance can be an overwhelming undertaking, especially for newly registered firms and even, as we see here, for large, established firms. Though Core Compliance certainly does work with broker-dealers and investment advisers to help them through the registration process, we believe that ongoing strategic relationships with our clients can help ensure compliance is maintained (especially given the cost of retaining full-time legal counsel or paying the salary of additional compliance personnel) and go a long way toward preventing situations like the ones above.
Compliance is a lot of work, but it’s also rife with subtleties — even seasoned broker-dealers and investment advisers are often surprised at the minutiae that can cause not-so-minute headaches.
If You Don't Have the Resources to Handle Compliance Internally, Outsource
Outsourcing does not have to be an all or nothing arrangement. A simple risk assessment performed by an outside compliance consulting firm can help identify high risk areas and gaps in a firm’s compliance program. Although having an ongoing relationship with an outside compliance consulting firm allows you to call and ask for help at any time and from someone who knows your business model.
Just remember, it’s important to perform due diligence on all service providers to help evaluated the soundness of the provider and ensure the services being completed are in line with contractual provisions.
For other outsourcing and technology needs, please see our latest guide, Resources for Compliance Professionals — Your 2018 Guide, lists a variety of service providers who help with different aspects of compliance.