The Utah division of securities last month moved to fine three large independent broker-dealers,
Cetera Advisor Networks,
LPL Financial and
CUSO Financial Services, a combined $2.25 million for industry rule violations stemming from how broker-dealers do business with credit unions.
Agreements between broker-dealers and credit unions allow broker-dealers to gain access to potential clients — credit union members — by having their sales reps in credit union locations. The credit union in return gains a competitive advantage and the ability to offer broader investment services to their members.
According to each of the three Utah petitions to censure and fine,
the Utah division of securities found that the broker-dealers "failed to comply with the regulatory requirements governing networking arrangements between broker-dealers and credit unions, approved the use of misleading sales and advertising materials and other information provided to customers and the public, failed to follow and enforce [their] policies and procedures and failed to reasonably supervise the businesses run through the credit unions."
The petitions are part of the process Utah follows when fining a broker-dealer and are filed before seeking an order from the Utah securities commission to censure the firm and impose a fine.
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It appears that states are more closely watching the relationship between broker-dealers and sales reps at credit unions. The outline for proper networking agreements dates back to 1993, according to the Utah petitions, and broker-dealers are responsible for all materials used to advertise or promote investment services.
Last year, the Massachusetts Securities Division fined LPL Financial $1 million for failing to supervise its financial advisers who operated out of the Digital Federal Credit Union.
Utah is looking to fine Cetera Advisor Networks $1 million, LPL $750,000 and CUSO $500,000.
"We're committed to enhancing our risk management and compliance structures, and take those obligations seriously," said LPL spokesman Jeff Mochal. "We look forward to working proactively with the Utah securities division to resolve this matter."
One firm took exception to Utah's reach in the matter.
"We disagree with the allegations made in the Utah division of securities petition, and have begun the process of vigorously defending ourselves in this matter," said Peter Vonk, chief compliance officer at CUSO, which works exclusively with credit unions.
Cetera Advisor Networks spokesman Joe Kuo declined to comment.
Under industry rules, advertising and promotional materials must make clear several distinctions in the various businesses when broker-dealers work with credit unions.
First, such materials must show that brokerage services are being provided by the broker-dealer and not the credit union. Second, they must show the credit union is not a licensed broker-dealer, and third, that the broker-dealer is not affiliated with the credit union.
In the case of Cetera, the firm "approved the use of misleading marketing names" that were "confusing" and "suggest" that a business other than the broker-dealer offered investment products and services,
according to the petition.
One credit union adviser who is registered with LPL told Utah regulators that the advisers disliked being known as "the LPL guy" in the office, according to the petition.
"We hate that because we want them to think of us as a partner, just like any of the other partners," the adviser said,
according to the petition. "They always refer to us as the LPL guy and we hate that."
