Consent Order for Failure to Supervise by New Jersey Bureau of Securities

The New Jersey Bureau of Securities recently entered into a Consent Order with LPL Financial. The broker dealer was found to have had poorly run supervisory procedures in place. Every broker dealer and securities firm in New Jersey has an obligation to establish reasonable policies and procedures to supervise and monitor the actions of the securities firm’s brokers and investment advisors. This lapse in adequate systems to supervise by the securities firm LPL, resulted in the sale of unregistered, non-exempt securities to LPL investors. According to the consent order the New Jersey Securities Bureau concluded that from October 1, 2006 to May 1, 2018 investment advisors marketed and sold unregistered securities to New Jersey Investors. The law firm of Lubiner Schmidt & Palumbo has written in the past on instances of securities fraud in connection with the sale of unregistered securities. One primary example of an unregistered security marketed to investors that turned out to be a securities fraud were Woodbridge Promissory Notes. These notes were marketed to investors as safe and secure investments that offered income and safety of the principal invested. In reality Woodbridge was a massive securities fraud operating as a Ponzi scheme.

The Attorney General and the NJ Bureau of Securities announced that LPL Financial had agreed per the terms of the Consent Order to a $499,000 civil penalty as well as a pledge to buy back any unregistered and non-exempt stock, bond or any other securities sold in New Jersey during the relevant time period by LPL investment advisors.

LPL also agreed to implement new supervisory procedures and compliance checks to prevent future sales and marketing of unregistered securities by investment advisors to New Jersey Investors. According to the consent order there were major deficiencies in the investment advisors compliance department.

Every securities firm owes a duty of reasonable supervision over its investment advisors. According to N.J.A.C. 13:47A–2.12, Chapter 47 of the Bureau of Securities Administrative Code, Subchapter 2 there are number of factors that are assessed in determining whether the investment advisor has reasonable supervision systems in place. These factors include:

  • Written policies and procedures and a system for applying policies and procedures pertaining to the sale of securities
  • Training of supervisory responsibilities
  • Actual enforcement of the polices in place by the investment advisory

Specifically, the New Jersey Bureau of Securities stated in its consent order released on May 1, 2019 that LPL did not coordinate Blue Sky Law compliance checks within certain departments at LPL. Blue Sky Laws are individual state securities. The New jersey Uniform Securities Act is a prime example of a Blue Sky law that ensures registration of securities prior to being marketed within the state to avoid fraud to local New Jersey Investors. Due to poor inter-department communication key state securities law compliance requirements were being disregarded. The New Jersey Bureau of Securities found that the LPL compliance department was poorly trained and not well maintained leading to systemic lapses in supervision requirements.

Civil penalties issued by the New Jersey Bureau of Securities have witnessed a significant uptick in the past several months. The acting State Attorney General Gurbir Grewal has an extensive background in securities fraud. One of his biggest cases, prior to becoming New Jersey State Attorney General, serving as a Federal prosecutor was a Ponzi scheme case. The New Jersey Attorney General has made prosecuting investment advisors in connection with securities fraud one of his top priorities.

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