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."


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