LPL Financial’s 1.4M Fine from NASAA Over Illiquid REITs

The Broker/Dealer Firm LPL Financial failed to provide suitable investments for clients by recommending illiquid Non-Traded (REITs).

LPL Financial, LLC agreed to pay a $1.4 million fine and to refund money to investors.

The fine is related to allegations that it inappropriately sold illiquid REITs (real estate investment trusts) to customers.

That is according to an agreement reached with state securities regulators.

The fine stems from a multi-jurisdictional investigation of the sales practices by the brokerage firm involving non-traded REITs. LPL is the largest independent broker-dealer firm in the United States.

The Real Estate Investment Trusts were authorized by Congress decades ago, and have become a popular means for individual investors to take part in large real estate projects like hotels, shopping malls and apartment buildings.

However, not all REITs are created alike. Just like stocks and mutual funds, some REITs can be acquired and sold on major exchanges. Non-traded REITs, however, are characteristically illiquid and cannot be readily sold when there is a need for money.

Owners of such products must sometimes hold them for years before they are sold.

Because of the illiquid nature of non-traded REITs, they are unsuitable for most individual investors, particularly those nearing retirement or those who need ready access to their capital.

The fine and settlement was negotiated by the North American Securities Administrators Association (NASAA), which represents state securities regulators all across the United States and Canada.

Securities Commissioner Gerald Rome said an inquiry concluded that LPL, through its reps/agents, sold non-traded real estate investment trusts in excess of/ in violation of the REIT’s prospectus standards, various state-concentration limits and LPL’s own Alternative Investment Guidelines.

The investigation also concluded that LPL Financial failed to implement a satisfactory supervisory system or oversight of these transactions which was reasonably designed to realize compliance with state law.

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This allowed some agents to violate state and internal concentration limits. In addition, the audit found that LPL’s stockbrokers sometimes did not observe suitability standards when recommending non-traded REITs.

As part of the settlement, the Boston firm will remediate losses for all unsuitable non-traded REITs the firm sold from January 1, 2008, through December 31, 2013.

In addition to the fines, LPL Financial must also pay restitution to roughly 2,000 investors. The firm will hire an independent third-party to assess and verify its sales-transactions and then make remediation offers to affected investors.

The firm will also settle with states regarding leveraged ETFs.

Under the terms of the agreement, the fine will be split amongst 48 states. The settlement covers all states save for New Hampshire and Massachusetts, which brought separate lawsuits against the firm.

  • New Hampshire Findings: LPL Finacial paid $750,000 to settle the case here related to an 81 year old man’s illiquid REITs who lost a lot of money from the bad investment.
  • Massachusetts Findings: The lawsuit from Massachusetts was from 7 unsuitable non-traded REITs from 2006-09. They settled with 2.5 million for not monitoring their brokers who earned higher commissions for selling these unsuitable financial products to clients.

LPL Financial is no stranger to fines relating to its sale of alternative investments. The firm paid $36.3 million (in aggregate) in 2014 to settle various regulatory charges.

Furthermore, in May of 2015 LPL Financial agreed to pay FINRA $11.7 million for its supervisory breakdown.

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