By Kenneth Corbin

LPL Financial has agreed to pay $18 million to resolve allegations that it failed to close or restrict thousands of high-risk accounts because of lax anti-money-laundering procedures.

The Securities and Exchange Commission alleges that from May 2019 through December 2023, LPL "experienced longstanding failures" in its vetting program that led to accounts remaining open after the firm was unable to verify the customer's identity.

The SEC also says that thousands of accounts prohibited under LPL's AML policies, including certain foreign and cannabis-related accounts, remained open without restriction because of what the agency described as an "ad hoc" record-keeping system that fell short of LPL's own written policies for its customer identification program, or CIP, which is a core requirement of an AML program.

"Federal law requires broker-dealers to ascertain the identity of their customers and to conduct ongoing customer due diligence to aid the government in its efforts to detect and prevent money laundering," says Stacy Bogert, associate director of the SEC's Division of Enforcement. "When broker-dealers like LPL fail to comply with their AML obligations, they put the securities markets at risk."

LPL settled the matter without admitting or denying wrongdoing.

"We take our regulatory obligations seriously and are pleased to resolve this matter," LPL says.

"The settlement relates to record-keeping and retention issues," it says. "We cooperated with the SEC's investigation and have taken proactive steps to enhance AML policies and procedures."

LPL's stock has climbed nearly 50% in the past year and was up 1% on Friday to $349, a 52-week high.

When a customer opened a new brokerage account with LPL, the firm would collect basic identifying information about the customer and relay it to an outside vendor to perform the verification process. If that process either couldn't verify all the relevant details about the customer or turned up certain risk factors, the account was deemed to have failed the CIP process. But LPL allegedly didn't follow an organized method for managing those restrictions.

Restriction-lifting process flagged. During the period of the alleged misconduct, LPL's registered representatives could try to get the restrictions lifted on behalf of the account holder and would often directly call LPL's service staff to attempt to resolve the issue.

"Upon receiving this call from the registered representative, the service team member was supposed to triage the issue, perform research, and communicate to the registered representative the outstanding documentation needed to try to resolve the CIP failure," the SEC says in its settlement order. "In practice, however, this restriction-lifting process was in numerous cases conducted while the service personnel team member was still on the call with the registered representative, lifting the restrictions without the CIP failure being resolved."

LPL's internal audit process "flagged LPL's restriction-lifting process as problematic" several times during the alleged misconduct, warning in a May 2019 email that no reporting or audit trail was documenting the process of placing or lifting restrictions on accounts, the commission says.

"There is not an effective way to capture reasons for restrictions being placed or modified and anyone with access can modify restrictions freely with no second check review," the internal email warned, according to the SEC. "This can result in restrictions being removed in error allowing for unauthorized account activity."

The SEC says that LPL's service team routinely lifted restrictions on accounts without having worked through the CIP issues. In October 2022, LPL identified more than 7,300 accounts that had outstanding CIP flags but had been permitted to remain open past the 60-day window stipulated in the firm's policies.

Cannabis business. One example of an allegedly problematic area of LPL's AML program involved the screening of accounts connected to the cannabis business. As of February 2023, the commission says, there were about 1,400 such accounts holding roughly $350 million, despite a company prohibition on "doing business with any person or entity involved marijuana production, distribution, or other ancillary operations."

In early 2023, LPL hired an outside consultant to review its AML program and provide recommendations to bring it into compliance. In addition to the fine, LPL agreed under the settlement to retain the consultant and enact the reforms it recommends.

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January 17, 2025 13:56 ET (18:56 GMT)

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