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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