As LPL Financial Expands, Scrutiny of Its Practices Intensifies

The company, LPL Financial, has 13,300 brokers, 6,500 offices, 4.3 million customers — and a growing list of problems with regulators.

At a time when many big-name brokerage firms are losing market share, LPL executives in San Diego have guided the company out of obscurity to become the nation’s fourth-largest brokerage firm — after Wells Fargo, Morgan Stanley and Merrill Lynch — and the largest in much of rural America, where it specializes.

Now, as investors weigh whether to jump aboard the stock market’s record-breaking rally, LPL is one of the biggest firms trying to connect them with stocks, bonds and other products. But the low-cost model that has aided LPL’s explosive growth has brought with it shortcomings that point to the difficulties regulators face in overseeing far-flung financial advisers.

As LPL has expanded, state and federal authorities have censured the company and its brokers with unusual frequency. LPL brokers have been penalized for selling complex investments to unsophisticated investors, for speculative trading in customer accounts, and, in a few cases, for outright stealing from clients.

“LPL is on our radar screen more than any other firm,” said Lynne Egan, who oversees securities regulation in Montana. Last fall, Ms. Egan brought a case against LPL, accusing it of failing to supervise a broker. She said her office is preparing to bring another case against the company, involving multiple brokers.

In the last year and a half, state regulators in Illinois, Massachusetts, Montana, Oregon and Pennsylvania have penalized LPL for failing to oversee its brokers properly. Brokers at the company have faced the most common industry reprimand more frequently than brokers at its large competitors since the beginning of 2012, according to a review of data from the Financial Industry Regulatory Authority, or Finra, the industry’s self-regulator.

Executives for the firm declined to comment for this article, but a spokeswoman, Betsy Weinberger, said in a statement that LPL had taken “steps to enhance our overall platform, including investing in our compliance process and oversight capabilities to support our growth. We remain steadfast in our commitment to serving investors and doing the right thing.”

Ms. Weinberger said the company increased its risk and compliance budget 5 percent last year and 11 percent this year.

LPL was created in 1989 through a merger of two older brokerage firms, Linsco, of Boston, and Private Ledger, of San Diego. It grew to national prominence after 2005, when two large private investment firms, TPG Capital and Hellman & Friedman, bought LPL and financed a number of acquisitions from California to New York. LPL went public in 2010, and its stock has been up slightly since then.

LPL’s rapid growth, and the problems that came with it, reflect forces that are changing the way millions of ordinary Americans interact with Wall Street. Since the financial crisis hit in 2008, prominent firms like Merrill, which long catered to individual investors, have lost brokers and customers.

Many investors have turned instead to independent brokerage firms like LPL. Unlike employees of the industry giants, LPL brokers are essentially contractors. They get LPL e-mail addresses and come under LPL compliance but pay for office space and staff.

For LPL and its brokers, it is a lucrative arrangement. With overhead costs relatively low, the company can pass a large percentage of commissions and fees — upward of 80 percent — back to its brokers. LPL has said that such a model is also an advantage for investors because the company does not have its own investment products, like the mutual funds created by the big banks, that it wants to push onto its customers.

But analysts say that the high commissions leave LPL less money for compliance and can attract brokers interested in skirting the rules. Brad Hintz, an analyst at Sanford C. Bernstein, said that LPL’s management had done a good job expanding the company and improving its compliance technology, allowing brokers with high standards to do well. But he said the scattered nature of its offices was an Achilles’ heel that exposed the company to lawsuits and regulatory risks.

“If the Indians run off the reservations, you have no one guarding the borders,” he said.

This article has been revised to reflect the following correction:

Correction: March 22, 2013

An earlier version of a chart with this article misstated a metric in determining the frequency of regulatory actions. It is the number of regulatory actions per 10,000 advisers, not per 1,000 advisers.

European Union Intensifies Sanctions on Iran

The measures were the latest in a long series of sanctions from Europe, the United States and the United Nations Security Council, and were evidence of the worsening damage to Iran’s economy.

In a joint statement, European Union foreign ministers, meeting in Luxembourg, expressed “serious and deepening concerns over Iran’s nuclear program.” They added that in continuing to enrich uranium, despite Western concerns that it is aiming for a bomb, Iran was “acting in flagrant violation of its international obligations.”

Ahead of the meeting, Catherine Ashton, the European Union’s foreign policy chief, said: “We want to see a negotiated agreement. But we will continue to keep up the pressure.”

Ms. Ashton represents six major powers, including the United States, in nuclear talks with the Iranians. There have been five rounds of discussions since late 2010, the last of which ended in frustration in June. Ms. Ashton said the major powers would keep in contact with Saeed Jalili, Iran’s negotiator, to assess when to convene another meeting.

Iran is suffering acute inflation from the weakness of the rial, the national currency, which lost 40 percent of its value against the dollar in recent weeks. Outside economists have pointed to Iran’s currency troubles as evidence that the sanctions, which have severely restricted Iran’s ability to sell oil and conduct international banking transactions, are having a profound impact. Iran has been showing new signs of problems, including severe drops in monthly oil and automotive production and in the number of foreign commercial ships docking at its ports. How to contain Iran’s nuclear ambitions has become an issue in the American presidential race.

The new European sanctions were necessary as a result of a “continued failure to satisfy the world that the program was for peaceful purposes,” said William Hague, the British foreign secretary.

But Carl Bildt, the Swedish foreign minister, emphasized the need for a more intensive diplomatic effort alongside the sanctions.

“I think there are voices that sound like they want a war,” Mr. Bildt said. “We don’t want war.”

The latest measures make business deals between Europe and Iran far more complicated. The European Union “agreed to prohibit all transactions between European and Iranian banks unless authorized in advance under strict conditions with exemptions for humanitarian needs,” according to an official statement.

The statement said that the European Union also had “decided to strengthen the restrictive measures against the Central Bank of Iran. Further export restrictions have been imposed, notably for graphite, metals, software for industrial processes, as well as measures relating to the shipbuilding industry.”

Iran’s supreme leader, Ayatollah Ali Khamenei, who has described the Western sanctions as economic warfare, said the latest measures were nothing new.

“Creating instability is among the arrogant powers’ insidious policies,” the semiofficial Fars News Agency quoted him as saying during a speech in Shirvan, in eastern Iran. He praised Iran’s “exemplary political stability and tranquillity,” adding: “The enemies wanted to make our people depressed and exhausted through their sanctions. Our nation’s will and resolve to defend the ruling Islamic system should be a lesson to them.” 

James Kanter reported from Brussels, and Thomas Erdbrink from Tehran. Rick Gladstone contributed reporting from New York.