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.