LPL Financial Charged with Improper Sales of Non-Traded Reits
Secretary of the Commonwealth William F. Galvin today charged LPL Financial LLC of San Diego, CA with a principal place of business at 75 State Street, Boston, MA, with failure to supervise agents who sold investments in non-traded real estate investment trusts in violation of both state limitations and the company's own rules. The Division also charged LPL with dishonest and unethical business practices.
A probe by the Securities Division found 597 transactions by Massachusetts residents in seven REITs with over $28 million invested, on which sales LPL received at least $1.8 million in commissions from 2006 through 2009. Of the 597 transactions reviewed by the Division 569 were found to have regulatory violations. These violations include (1) sales made in violation of Massachusetts 10% concentration limitations, (2) sales made in violation of prospectus requirements and (3) sales made in violation of LPL compliance practices.
The administrative complaint seeks a cease and desist order against LPL a censure and full restitution to those investors who were sold these instruments in violation of Massachusetts regulations and the requirements of the REIT prospectus.
“Non-traded REITs present risks to investors,” said Secretary Galvin. “Massachusetts recognizes those risks and requires limits on an investors' exposure to the high fees, potential illiquidity, and risky nature of non-traded REIT products. In addition to the Massachusetts rules, the non-traded REIT prospectus contained liquid net worth, net worth, and annual income limitations.”
“Writing those investor protection provisions into the prospectus means little if the representatives selling the investment ignore the restrictions imposed by state limitations as well as the company's own rules,' Galvin said.
REITs own and manage income-producing property or are involved in real estate financing. Non-traded REITs have limited redemption programs, and high fees and commissions that range between 15 and 18%.
“At their core, non-traded REIT products operate through an immensely complex affiliated and subsidiary structure rife with conflict,” the complaint noted. “Although non-traded REITs may diversify a portfolio and provide dividend income if utilized by a properly trained agent, comprehensive supervision and training by brokers is required.”
“LPL's lack of adequate training and supervision only exacerbated problems resulting from LPL's oversight of non-traded REIT prospectus and Massachusetts state requirements,” the complaint stated. “Both LPL employees responsible for the review and approval of non-traded REIT transactions and LPL representatives facilitating sales were undereducated and under-supervised with respect to non-traded REIT transactions.”
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