The Massachusetts Securities Division filed a complaint against LPL Financial, LLC, accusing the firm of inadequate training, improper sales practices, including sales made in violation and in excess of Massachusetts state and LPL prospectus limits in violation of LPL's internal compliance guidelines.
These violations were all related to LPL's sales of non-traded real estate investment trusts (REITs), which are often illiquid and risky investments due to limited redemption programs, steep commissions and fees and, accordingly, increased conflicts of interests experienced by firms and brokers. As such—and because of the non-traded REITs' minimum reporting requirements—comprehensive supervision and training for brokers is vital. Additionally, the increased risk associated with non-traded REIT products—and the higher commissions and fees that produce conflicts of interest within firms—have resulted in carefully established limits concerning REIT sales.
Massachusetts found what it deemed "a boat with many holes," first finding that LPL representatives violated LPL's internal compliance manuals and written supervisory procedures by exceeding limits outlined the firm's prospectus and state requirements. For instance, the documentation specifies that LPL investments shall experience a limit of "10% of net worth in public managed futures." The Massachusetts Enforcement Section found that LPL REIT sales exceeded this limit on multiple occasions, thus subjecting its investors to additional high fees, illiquidity and increased risks associated with the already-risky REIT. Similarly, the excess sales also allowed LPL to reap a higher gross commission due to the high fees associated with REITs.
Specifically, the Enforcement Section found that in $28 million-worth of non-traded REIT investments, LPL received a $1.8 million commission, with Enforcement finding that 569 of the firm's 597 transactions under review violated prospectus requirements, with at least 77 violating solely state concentration requirements.
When asked about the aforementioned 10%-limit, LPL supervisory staff reportedly responded, "I don't believe that was a restriction that we would look at."
In regards to REIT training, a senior supervisor reportedly testified, "We've had PowerPoint presentations on REITs. Management has gone over certain training aspects of it, so that's probably the extent of our training."
In regards to specific approved products, the same supervisor responded "No" to the question, "Did you receive any specified training as to specific REITs?"
In all, Enforcement found that at least 95% of LPL's non-traded REIT transactions violated either prospectus, Massachusetts requirements or both.
When asked about prospectus-related training, the aforementioned senior supervisor reportedly told an Enforcement investigator, "We never took a prospectus and reviewed it and trained on an actual prospectus … That would be left to management, senior management."
Accordingly, LPL was also charged with inadequate training of LPL designated principals and representatives, with Enforcement finding that LPL's previous level of training and oversight "only exacerbated regulatory violations."
Finally, LPL was charged with violating several state regulations, including the "dishonest and unethical practices in the securities business" regulation concerning brokers and dealers. FINRA/NASD Rule 2010 concerning high standards of commercial honor and just and equitable principles of trade was also cited.
If you invested with LPL Financial, Inc. or with any broker or firm who you believe has improperly sold you an non-traded REITs which have 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.
News: Secretary Galvin Charges LPL Financial with Improper Sales of Non-Traded REITs (Secretary of the Commonwealth of Massachusetts)