May 2, 2018

Broker-Dealer Settles State Law Action Concerning Non-Exempt Securities

Nihal Patel Commentary by Nihal Patel

A broker-dealer agreed to settle charges with various state securities authorities following an investigation led by state securities regulators in Massachusetts and Alabama. The investigation concerned deficiencies relating to the sale of unregistered, non-exempt securities to customers. As a condition of the settlement, the broker-dealer will buy back affected securities from investors and pay civil penalties, which could total more than $26 million.

The regulators have alleged that LPL Financial LLC ("LPL") failed to maintain adequate systems to prevent the sale of unregistered, non-exempt securities. Regulators did not find evidence that LPL's actions were "willful, reckless, or fraudulent," but determined that certain alternative investments sold during this period of time were unsuitable. Regulators additionally found that LPL failed to comply with state recordkeeping requirements and necessary due diligence.

Under the terms of the settlement, LPL will review all procedures and operations, as well as its vendor service protocols. Additionally, each of the jurisdictions (the District of Columbia, Puerto Rico, the U.S. Virgin Islands and 49 states) in the settlement will receive $499,000 upon entering into a final consent order with LPL.


It is difficult to glean much detail from NASAA's brief statement and the absence of a detailed public order setting forth the allegations and settlement. However, NASAA did say that the investigation focused on LPL's "retention, use and subsequent cancellation of certain third-party services integral to LPL's compliance with state securities registration requirements."

As such, NASAA's action reminds market participants that (i) notwithstanding the broad exemption from state regulation in Section 18 of the Securities Act, a number of types of securities – among other things, certain private placements and intrastate offerings – still require state registration, and (ii) broker-dealers will be expected to know if the securities they sell must be state-registered (or at least have (and monitor) a third-party service provider that will do the diligence for them).

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