LPL Financial must pay $1.4 million in fines after reaching an agreement with state securities regulators. The fines stem from a multi-jurisdictional review of the brokerage firm’s sales practices involving nontraded REITs. LPL is the largest independent brokerage firm in the United States.
The term REIT refers to Real Estate Investment Trust. Authorized by Congress decades ago, REITs have become a popular way for individual investors to participate in large real estate projects such as hotels, apartment buildings and shopping malls. Not all REITs are created alike, however.
Some REITs can be bought and sold on major exchanges just like stocks and mutual funds. Nontraded REITs, however, are typically illiquid and can’t be readily sold if there is a need for cash. Owners of these products sometimes must hold them for years before they can be sold.
The illiquid nature of nontraded REITs makes them unsuitable for many individual investors, especially those that need ready access to their capital and those nearing retirement.
The North American Securities Administrators Association negotiated the fine and settlement. The NASAA represents state securities regulators in the United States and Canada.
Under the terms of the settlement, the fine will be split among 48 states.
The NASAA investigation found that LPL Financial did not properly supervise its stockbrokers regarding sales of nontraded REITs. That allowed some brokers to violate both state and internal concentration limits.
Because nontraded REIT products are so illiquid, several states have limited how much of these products can be sold to investors. Although an individual investor can purchase whatever product he or she wants, brokers are prohibited from recommending more than a fixed percentage of illiquid securities for a client’s portfolio. Regulators want to insure that investors are not over concentrated in investments that can’t readily be sold if the customer needs to raise cash.
The audit also found that LPL’s stockbrokers sometimes ignored suitability standards when recommending nontraded REITs.
In addition to the fines, LPL must also pay restitution to approximately 2000 investors.
In announcing the settlement, lead investigator Diana Foley of the Nevada Securities Division said, “Non-traded REITs can be risky and have limited liquidity It’s very important that broker-dealers are complying with the offering’s suitability standards and enforcing their own policies and procedures when selling them.”
In settling the charges, LPL did not admit any wrongdoing.
In recent years, LPL has been subject to millions of dollars in fines including a large fine from Massachusetts over the sale of nontraded REITs.
If you lost money in a non traded REIT or other illiquid investment, give us a call. We handle cases on a contingency or “success” fee basis meaning no legal fees unless we recover money for you.