New Jersey smacks LPL with fine of nearly $1M over REIT, BDC sales

Settlement claimed firm let brokers sell excessive amounts of alternative investments as a percentage of their clients' total portfolios

Oct 30, 2017 @ 5:07 pm

By Bruce Kelly

Citing a breakdown in supervising its brokers concerning suitability requirements tied to sales of illiquid alternative investments, the New Jersey Bureau of Securities fined $950,000 and ordered it to pay $25,000 to a state investor education fund.

According to the prospectus of one nontraded real estate investment trust cited in the settlement, a client's total investment in illiquid REITs could not exceed 10% of the investor's liquid net worth. One client described in the settlement, with a liquid net worth of $350,000, would ultimately buy $69,000 of nontraded REITs, or close to 20% of the client's liquid assets.

Similarly, New Jersey clients could not invest more than 10% of their liquid assets in nontraded business development companies, according to a prospectus cited by New Jersey. One LPL client had about 13% of liquid assets in BDCs.

LPL failed to follow its own supervisory procedures regarding the offering and sale of these types of investments, and it also failed to keep adequate books and records, according to the settlement, which was reached last Tuesday. The company received gross sales commission of up to 10% from sales of alternative investments by LPL affiliated brokers, according to the settlement.

New Jersey's review of LPL sale practices covered "several years," more than 5,200 nontraded REIT sales and 2,100 illiquid BDC sales, as well as a smattering of transactions that involved closed-end funds and other alternative investments.

LPL Financial has been in hot water with regulators over sales of nontraded REITs for several years.

Indeed, LPL has racked up millions of dollars in fines and payments to clients over the sale of nontraded REITs, a high commission product out of favor as the industry adapts to the Department of Labor's fiduciary rule for retirement accounts.

In September 2015, LPL reached a settlement with state regulators, agreeing to pay a $1.43 million fine and return money to clients for inappropriate sales of nontraded REITs. In December 2015, LPL paid a $750,000 fine and offered to pay remediation to any New Hampshire client who was sold a nontraded REIT since 2007 if the sale exceeded LPL's own guidelines or product specific restrictions.

And in February 2013, LPL and Massachusetts agreed to a settlement in which the firm would pay at least $2 million in restitution and $500,000 in fines over the sales of nontraded REITs.

"The state of New Jersey Securities Bureau chose not to participate in our 2015 settlement with the North American Securities Administrators Association regarding non-traded REITs," wrote LPL spokesman Jeff Mochal in an email. "We are pleased now to have reached a settlement with the New Jersey Securities Bureau regarding REITs and [alternative investments] in this matter."


What do you think?

View comments

Recommended for you

Climate change and gender equality are two of the most critical issues facing our global economy today. How can investors make an impact (and strong returns) by investing in these areas? PAX World's Joe Keefe offers some thoughts.

Video Spotlight

Sponsored by Prudential

Recommended Video


Latest news & opinion

Merrill Lynch releases new compensation plan

Advisers bringing in enough accounts will be rewarded, those falling short will see compensation cut.

Brian Block sentenced to 18 months in prison

The government had sought a sentence of at least seven years against the former Nick Schorsch colleague.

Clayton: SEC targets 'complex, hidden fees'

Putting clients in expensive share classes instead of lower-cost ones hurts investors, chairman says.

LPL says it's on track to recruit 70% of National Planning Holdings revenue

Rivals have picked off some big NPH teams, but LPL said it is getting the lion's share of revenue from the acquisition.

Philip Palaveev on how firms should be recruiting young talent

Next generation needs and deserves more attention and training.


Subscribe and Save 60%

Last News

cost of cfp exam cost of h&r block tax preparation gm financial income calculator vanguard target retirement 2035 fund retirement calculator prudential oasdi tax 2014 hsa employer contribution limit merrill lynch retirement calculator etf calculator verizon top ten most valuable baseball cards t rowe price benefits t rowe price investment services inc surcharge on salary muni etf vanguard ny 529 reit vs stocks t rowe retirement calculator dodge cox income taxable money market funds turbo tax efile fee best performing global equity funds qualified dividends vs ordinary dividends irs lump sum pension payout calculator comerica hr connect ssa spousal benefit direct rollover to roth ira contributions to sep ira vanguard roth iras hud mortgage insurance deluxe turbo tax fidelity floating rate high income fund money talks dealer fee