LPL faces legal challenge over money laundering program


LPL Financial's money laundering programs breached its fiduciary responsibilities to its advisory clients, according to an alleged client who filed suit in California federal court.

Daniel Peters filed the complaint in the Southern District of the Golden State, seeking class classification on behalf of LPL's other customers.

Peters claims he is a customer of LPL and a resident of Michigan, maintaining “managed and streamlined accounts” into which LPL funneled money into the DCA and ICA programs — the money laundering programs at the center of the allegations.

According to Peters, LPL's money laundering program began as a “series of manipulations” of customer cash but, in recent years, “has transformed into an aggressive and illegal effort” to increase LPL's profits in at the expense of customers. He said clients lose money on cash positions in managed client accounts.

In the lawsuit, Peters alleged that the dual cash-sweeping programs are designed to ensure that LPL always receives a larger share of the interest on holding the cash, compared to the interest a customer would receive if the funds were placed in a typical money market fund or at a bank. Savings account.

Daily cash not invested in customer accounts is deposited into some pre-selected bank accounts at institutions selected by LPL. This money generates interest every day, but this interest goes back to LPL and is not paid directly to customers.

Instead, LPL splits most of the interest for itself, while a small percentage goes to clients (according to the lawsuit, LPL does not disclose how much interest the firm is allegedly holding from clients). The percentage payable to LPL customers does not change regardless of which banks LPL uses to invest cash or if interest rates change.

LPL's return on these assets shows the “magnitude” of how beneficial the cash-cleaning program is to the firm, according to Peters. In the first quarter of 2024, the profit made on client money held at the firm exceeded the total return on assets from advisory fees, commissions and interest income combined, the suit alleges.

“In effect, the brokering operation (LPL) has effectively become a legal conduit for its illegal programs – costing the plaintiff and class members a substantial amount of money,” the lawsuit states.

Additionally, Peters argued that the management fee that some customers pay LPL on their accounts also applies to the portion of cash placed in clearing accounts, in addition to the specific management fees, LPL fees for those programs.

“Thus, the returns on most of their client cash holdings are generally less than LPL's “managed” cash outlays—meaning that most (LPL) clients see negative returns on their cash holdings. cash because they are automatically included in the (LPL) Programs,” the lawsuit claims.

Peters also alleges in the lawsuit that LPL's disclosure materials on money laundering programs were misleading. In its summary of its relationship, LPL states that it must always act in the best interest of the client when acting as an ab/d or investment adviser. Regarding the cash-laundering programs, LPL allegedly said the fees it charged were “typically” higher than the interest customers earn.

But Peters argued that the firm is acting as an adviser to those money-laundering programs, making decisions about how and where to invest the excess money and the terms under which it will be invested. These decisions violate the duty of good faith, as they always put LPL's interests ahead of customers. According to the lawsuit, the money LPL received was always — not “usually” — higher than what customers pocketed.

Peters' attorney did not respond to a request for comment. LPL spokespeople did not return requests for comment prior to publication.

Earlier this week, Morgan Stanley revealed in an earnings call that they were considering changes to their clearing programs; Morgan Stanley Chief Financial Officer Sharon Yeshaya said the company intended to change its advisory write-off rates “against the backdrop of changing competitive dynamics.”

The changes come as some banks and firms face regulatory scrutiny over their money laundering options. Last December, Wells Fargo disclosed that the Securities and Exchange Commission was looking into the money laundering options the firm offers to advisory clients. according to Reuters. Wells Fargo also announced this week that it was raising rates on its money laundering accounts, according to Barron's.



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