According to FINRA, Lebenthal Financial Services, Inc. was censured and fined $50,000 on August 31, 2023.
FINRA found that the firm failed to reasonably supervise the creation, use, and dissemination of consolidated reports. The firm prohibited its registered representatives from creating, using, and disseminating to customers consolidated reports; however, it did not have any system or procedures to identify when such events occurred in violation of the prohibition.
Despite the firm's prohibition, a representative created hundreds of consolidated reports, and he disseminated an unknown number of those reports to his customers. Subsequently, the firm revised its written supervisory procedures to permit the use of consolidated reports with prior approval from a designated principal and subject to supervisory review.
FINRA also found that the firm disseminated consolidated reports that omitted material disclosures to customers. The reports failed to provide a sound basis for evaluating the content. Additionally, the firm failed to preserve copies of the consolidated reports disseminated to customers, which violated recordkeeping requirements.
Consolidated reports are documents that combine information about a customer's accounts held at multiple financial institutions into a single report. These reports can be helpful tools for customers to view their overall financial picture, but they also create compliance challenges for broker-dealers. Consolidated reports may include accounts and assets that are not held at or supervised by the broker-dealer, which can create misleading impressions about the scope of the broker-dealer's services or responsibilities.
When consolidated reports are disseminated without proper disclosures, customers may not understand which accounts and assets are held at the broker-dealer (and therefore subject to FINRA rules and SIPC protection) and which are held elsewhere. They may also not understand that the broker-dealer has no responsibility for, or ability to supervise, assets held away from the firm.
The failure to supervise the creation and dissemination of these reports meant that customers may have received misleading information about their financial holdings without proper context or disclosures. The failure to preserve copies of the reports also violated fundamental recordkeeping requirements that enable regulatory examinations and investor protection.
Investors who receive consolidated reports from their broker should carefully review the disclosures to understand which accounts and assets are held at the broker-dealer and which are held elsewhere. They should understand that their broker generally has no supervisory responsibility for assets held at other institutions, even if those assets appear on a consolidated report provided by the broker.
