More On Legal & Compliancefrom The Advisor's Professional Library
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
- How to Avoid Sabotaging Your Compliance Exam There is much more to compliance examination survival than knowing all of the rules. It helps to understand why the rules were put in placeand to recognize that examiners are not the enemy.
Massachusetts securities regulators sued LPL Financial (LPLA) on Wednesday over sales of non-traded REITS from 2006 to 2009.
Of nearly 600 transactions, the Enforcement Division in the Massachusetts Securities Division filed a complaint that said it found close to 570 trades in violation of prospectus rules, and at least 77 trades worth about $4.7 million were made in violation of state investment-concentration requirements.
The non-traded REIT sales in question for the LPL-affiliated reps totaled about $26.5 million and brought in $1.8 million of gross commissions. According to the Massachusetts regulators, “LPL received high commissions starting at 6%” of sales.
There are currently 13,170 FAs affiliated with LPL, which is led by Mark Casady (right).
“We believe the claims included in the complaint are substantially overstated. LPL Financial takes protection of investors’ interests seriously,” the company said in a statement. “We have always endeavored to promote a strong culture of compliance and continue to do so.”
The Massachusetts regulator says it received complaints from multiple investors who had bought shares of Inland American Real Estate Trust and other non-traded REITs through financial advisors affiliated with LPL Financial and offered for sale on the LPL platform.
The other non-traded REITS were Cole Credit Property Trust II, III and 1031 Exchange; Wells Real Estate Investment Trust II, W. P. Carey Corporate Property Associates 17 and Dividend Capital Total Realty.
In addition to violation of specific state and prospectus rules, the sales involved violations of LPL compliance practices. The complaint states that “non-traded REITS are especially risky through limited redemption programs, high fees and commissions, and internal conflicts of interest.”
It notes that LPL did have “stringent requirements” for the sale of non-traded REITs, but “failed to review properly sales” of these instruments—namely the requirement that these products not represent more than 10% of an investor’s net worth.
The regulator also points out that, according to LPL compliance documents, the broker-dealer “cannot make exceptions to prospectus suitability requirements or the regulatory imposed limit of 10% of net worth in public managed futures.”
Despite this stipulation, LPL-affiliated advisors “frequently made transactions in violation of product prospectus and Massachusetts requirements.”
“For at least two years, one supervision employee at LPL was completely unaware of Massachusetts’ requirements concerning the sale of non-traded REITS,” it said in the complaint.
In addition, “LPL representatives received limited training and supervision, as well. One LPL representative resorted to flying to non-traded REIT issuer headquarters—paying out of his own pocket—to learn about non-traded REIT products. Others relied solely on publicly available and non-vetted Internet sources.”