The New Jersey Bureau of Securities announced that LPL Financial, the second-largest
independent broker-dealer in the US, was fined $950,000 and agreed to
pay $25,000 to the state’s investor education fund arising from
the firm’s failure to properly supervise sales of illiquid alternative
investments to customers, including non-traded REITs and BDCs. It is alleged
that LPL even altered information on customer forms to make it appear
that sales were in compliance with LPL’s policies and procedures
when, in fact, they were not.
According to an Administrative Consent Order dated October 24, 2017, LPL’s
supervisory personnel rejected various sales of alternative investments
to LPL clients as being out of line with the firm’s guidelines with
respect to age, risk tolerance, and financial circumstances. As part it
its investigation, state regulators found various instances where, after
a transaction was rejected by LPL, the form was resubmitted with changed
information that complied with LPL’s policies, and the sales were
thereafter approved by LPL supervisors.
LPL financial advisors also sold REITs, BDCs, and other risky alternative
investments to customers in violation of heightened suitability standards
required under New Jersey law. These requirements limit the percentage
of a client’s portfolio that alternative investments are allowed
to comprise based on the client’s net worth or combination of income
and net worth.
As part of their investigation, New Jersey state securities regulators
found numerous instances where LPL customers’ portfolios were improperly
over-concentrated in REITs, BDCs, and other risky investment vehicles.
Among the investments specifically noted by investigators are
Carey Watermark Investors II,
FS Energy & Power Fund,
Hines Global REIT,
Northstar Real Estate Income II,
Northstar Healthcare Income, Inc., and
CION Investment Corporation.
The investigators also found instances where LPL failed to furnish required
documentation to clients or provide updated client account record information.
In one instance, a client opened an account in 2001 with an investment
objective of “growth.” The account objective was changed internally
in 2008, but LPL was unable to produce account statements or specific
letters timely confirming such change with the client.
This is not the first time that LPL has been in hot water because of improper
sales of alternative investments. In September 2015, LPL paid over $1.43
million in fines as part of a multistate investigation spearheaded by
the North American Securities Administrators Association (NASAA) relating
to inappropriate sales of nontraded REITs. Later that year, LPL separately
paid a $750,000 fine to the state of New Hampshire for improper nontraded
REIT sales. In February 2013, LPL agreed with Massachusetts regulators
to pay at least $2 million in restitution and $500,000 in fines, again
for improper sales of nontraded REITs.
If you have questions about non-traded REITs, BDCs, or other alternative
investments that have been sold to you by your stock broker,
contact the experienced securities arbitration attorneys at Meyer Wilson for consultation at no cost.