New England Regulators Step Up Independent Broker Policing
The state of Massachusetts on Monday said that LPL FInancial agreed to pay $3.7 million in fines, investor relief and commission disgorgement while it prosecutes the independent contractor whose variable annuity sales practices were behind the penalties.
The sanction mirrors the state of New Hampshire’s collection of some $2.9 million in fines and disgorged fees from Waddell & Reed in December over sales of financial plans by a veteran Waddell contractor who the state is separately pursuing.
The state actions against the so-called independent brokerage firms and their former registered come as some state regulators argue the need for them to step up prosecutions amid the Trump administration’s plans to ease federal regulatory enforcement.
“With the risk of the Department of Labor’s fiduciary rule being dismantled, it is crucial that the states step in to fill this void,” Massachusetts’ crusading Secretary of the Commonwealth William F. Galvin said in a prepared statement accompanying the LPL action. “The securities division and I intend to do that by vigilantly policing this area to protect retirees, and I would caution Washington not to dismantle Labor’s rule, and abandon mom-and-pop investors.”
The settlement with LPL, the largest independent broker-dealer that offers business and oversight services to some 14,100 independent brokers, involved sales of “scores of large, illiquid, unsuitable, high-commission variable annuities” through 401(k) and 4013(b) rollover recommendations by Boston-based broker Roger S. Zullo, a spokesman for Galvin confirmed.
Zullo collected more than $1.8 million in commissions over three years and added thousands of dollars in surrender charges to his elderly clients, the state charged in a December 1, 2016, complaint. LPL’s “paper-thin compliance review process” failed to detect red flags and discrepancies in Zullo’s misrepresentations of clients’ ages and net worths, Galvin’s office said.
LPL filed a “separation notice” against Zullo one day after Massachusetts sued him, according to his BrokerCheck record. “We take our responsibility to supervise very seriously and are committed to serving our investors,” an LPL spokesman wrote in an e-mail. “We are pleased to have worked with the State of Massachusetts to resolve this matter.”
Zullo, as well as his former partner, did not respond to requests for comment.
Waddell & Reed Financial, which has nearly 1,800 independent financial advisors in 160 offices, agreed late last year to pay New Hampshire regulators $900,000 in penalties and recovery and refund more than $2 million in financial planning fees paid by the clients of an investment adviser who “verbally misrepresented to many of his clients, stretching over a number of years, the nature of the financial planning fees being charged,” the state’s securities bureau said.
It did not name the dually-registered advisor, but two well-placed sources who spoke on condition of anonymity confirmed that he is Curtis Ridlon, who according to his BrokerCheck database ran a Bedford, New Hampshire office for Waddell & Reed for 31 years.
Ridlon could not be reached for comment, and calls left for him at his former office were not returned.
The broker has been terminated as an investment adviser, according to a Waddell official who spoke on condition of anonymity. He is not currently registered as a broker, according to BrokerCheck, which does not show a termination event in his brief disclosure history.
As part of its settlement with New Hampshire, which has an ongoing investigation against Ridlon, Waddell & Reed consented, without admitting or denying guilt, to findings that its supervision of financial plan sales was deficient and agreed to centralize oversight of them at its Kansas headquarters.
The company had in any case been moving supervision of most of its regulatory procedures from larger brokers overseeing regions to its headquarters, the sources said, as have LPL and other independent brokerage firms that have been accused of lax oversight.
Like many of those firms, Waddell & Reed advisors often use so-called financial plan preparation as tools to sign up clients for investment accounts.
—Mason Braswell contributed to this story.