Articles Tagged with overconcentration

LPL Financial, the self-proclaimed “nation’s largest independent broker-dealer” was recently fined $950,000 by securities regulator FINRA for allegedly failing to supervise its brokers that sold alternative investments.  In a letter of Acceptance, Waiver and Consent (“AWC”), signed March 24, 2014, LPL Financial (“LPL”) settled FINRA’s charges that it failed to implement an adequate supervisory system for the sale of alternative investments.

FINRA’s complaint focuses on LPL’s failure to have a suitable system in place to identify and determine whether purchases of alternative investments, such as equipment leasing programs, real estate limited partnerships, hedge funds, and managed futures, caused its customers’ accounts to be unsuitably concentrated in these types of investments.  The allegations further state that LPL’s three-tiered supervisory system had deficiencies at each tier that allowed its customers to become overconcentrated in alternative investments from January 1, 2008 through July 1, 2012.

Alternative investments are complex, high-commission, investments frequently sold by investment banks as an alternative to investing in the stock market.  The Securities and Exchange Commission issued a press release in 2014 to remind financial advisors of the compliance requirements related to the recommendation of alternative investments to investors.  Despite this, few retail investors are advised that alternative investments can be illiquid, speculative, and rife with conflicts of interest.  Unfortunately for investors, the $950,000 fine will not be paid to the victims.  Instead, investors who have been damaged may pursue FINRA arbitration claims to recover damages.