The Commonwealth of Massachusetts' Securities Division charged SII Investments, Inc. with dishonest and unethical conduct, including supervisory failures, in allowing "systematic" inflation of clients' liquid net worths related to its non-traded real estate investment trusts (REITs) business, all while the firm and its agents pocketed high commissions as customers were unable to access needed funds.
The complaint states that SII Investments improperly listed net worth and liquid net worth of at least 20 clients as identical.
Specifically, the Commonwealth regulator alleged that in inflating investors' liquid net worths, SII representatives allowed potential overconcentration of risky REIT products in customer accounts in violation of SII's compliance rules, and that SII compliance personnel failed to supervise the agents over-selling REITs.
For instance, SII personnel recommended that one client in her 60s purchase a non-traded REIT even though the client already had purchased three illiquid annuities that comprised approximately 72% of her net worth, all of which carried high surrender fees and lock up periods of five-to-10 years. Prior to purchasing, the client had told SII that she "anticipated needing immediate access to her funds," yet SII nonetheless recommended purchasing the REIT, and the client "was unable to access the majority of her funds without paying significant penalties" when she subsequently needed to, as she had predicted.
Massachusetts requires that investors not hold any one REIT as more than 10% of their liquid net worth. By inflating a client's net worth, SII reps may have put customers in the position of holding over 10% of their portfolios in a single REIT.
For instance, if an investor's liquid net worth is $1 million, the investor may not hold more than $100,000-worth of any one particular non-traded REIT. If that same investor's liquid net worth were to be inflated to, say, $2 million, the customer may have ended up purchasing up to $200,000 (10% of 2 million) instead of their allotted $100,000 (10% of 1 million), adding an unnecessary layer of risk.
The complaint states that in purchasing excessive REITs, SII Investments and its brokers alike received high commissions associated with the additional sales, and that the firm included illiquid annuities products with surrender fees as liquid for non-traded REIT liquid net worth calculations, even though SII's own internal policies state that annuities are illiquid products and, thus, should be excluded from the liquid net worth calculation.
According to MA, many of the excessive REIT sales could not have occurred had SII Investments properly identified annuities as illiquid products, in accordance with these policies. Instead, the Commonwealth found that SII compliance officers "simply rubber-stamped non-traded REIT sales without any meaningful review."
LPL Financial is in the process of acquiring National Planning Holdings, which owns SII Investments, though LPL wrote that under the terms of the acquisition agreement, LPL itself would not be liable for SII Investments' purported REIT concentration violations.
If you have invested with SII Investments or with any broker or financial adviser in non-traded REITs or other complex products which were purchased in an excessive quantity due to liquid net worth miscalculation or otherwise, and this improper overconcentration of risky and illiquid securities has proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.