LPL Financial Charged with Improper Sales of Non-Traded Reits

Secretary of the Commonwealth William F. Galvin today charged LPL Financial LLC ofSan Diego, CA with a principal place of business at 75 State Street, Boston, MA, with failure tosupervise agents who sold investments in non-traded real estate investment trusts in violation ofboth state limitations and the company's own rules. The Division also charged LPL withdishonest and unethical business practices.A probe by the Securities Division found 597 transactions by Massachusetts residents inseven REITs with over $28 million invested, on which sales LPL received at least $1.8 million incommissions from 2006 through 2009. Of the 597 transactions reviewed by the Division 569were found to have regulatory violations. These violations include (1) sales made in violation ofMassachusetts 10% concentration limitations, (2) sales made in violation of prospectusrequirements and (3) sales made in violation of LPL compliance practices.The administrative complaint seeks a cease and desist order against LPL a censure andfull restitution to those investors who were sold these instruments in violation of Massachusettsregulations and the requirements of the REIT prospectus.“Non-traded REITs present risks to investors,” said Secretary Galvin. “Massachusettsrecognizes those risks and requires limits on an investors' exposure to the high fees, potentialilliquidity, 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 incomelimitations.”“Writing those investor protection provisions into the prospectus means little if therepresentatives selling the investment ignore the restrictions imposed by state limitations as wellas the company's own rules,' Galvin said.REITs own and manage income-producing property or are involved in real estatefinancing. Non-traded REITs have limited redemption programs, and high fees and commissionsthat range between 15 and 18%.“At their core, non-traded REIT products operate through an immensely complexaffiliated and subsidiary structure rife with conflict,” the complaint noted. “Although non-tradedREITs may diversify a portfolio and provide dividend income if utilized by a properly trainedagent, comprehensive supervision and training by brokers is required.”“LPL's lack of adequate training and supervision only exacerbated problemsresulting from LPL's oversight of non-traded REIT prospectus and Massachusetts staterequirements,” the complaint stated. “Both LPL employees responsible for the review andapproval of non-traded REIT transactions and LPL representatives facilitating sales were undereducated and under-supervised with respect to non-traded REIT transactions.”