Mark Casady is chairman and CEO of LPL Financial.

New Hampshire regulators have taken legal action against LPL Financial (LPLA) in an effort to win a $3.6 million judgment over nontraded REIT sales to an elderly investor and the broker-dealers alleged failure to consistently supervise such sales. The state is asking for restitution of $2.4 million, as well as a $1 million fine and repayment of $200,000 to cover the costs of its investigation costs.

The New Hampshire Bureau of Securities Regulation began work on the matter in early 2008, after an older client complained about losses tied to an initial investment of $253,000. At the time of the investment, the client was over 70, and her liquid net worth was $2.5 million.  

The state’s regulators then began an investigation of and found that “LPL had made numerous sales of nontraded REITs to New Hampshire investors that violated New Hampshire securities law and LPL’s guidelines on [Alternative Investments or] AI concentration,” according to a court order.

LPL claimed only 10 sales made since 2007 were unsuitable, and the bureau pursued further investigation.

The regulators found that “LPL not only violated its own [written standard procedures] and AI Concentration caps on numerous occasions, but also that LPL’s WSPs and supervisory systems as they relate to the sale of nontraded REITs were systematically flawed, resulting in hundreds of unlawful or unsuitable nontraded REIT sales to New Hampshire investors.”

LPL, which has 30 days to request a hearing on the matter, says it “regrets that we were unable to reach a mutually agreeable resolution.”

The broker-dealer notes in a statement that it has “dedicated substantial resources to addressing these legacy issues and enhancing our practices around the sale and supervision of alternative investments. We take the protection of investors’ interests seriously, and remain committed to ensuring investors in the state of New Hampshire and elsewhere are treated fairly.”

Alternative Interpretations

To calculate the suitability, liquid net worth of a client and the maximum amount of an alternative investment clients can purchase is a fairly complex process. It must take into consideration age, investment objectives and other factors, including a client’s current holdings in alternatives.

Since alternative-investment holdings are not liquid, the proposed purchase amount cannot be included in the client’s liquid net worth; rather, it must be taken out of the LNW value and included in amount of AI holdings. The cap for alternatives is 15% of liquid net worth for clients over 70, for instance, but the cap may be more limited depending on the client’s investment objective.

While LPL had procedures in place, its advisors sold non-traded REITs “based on clearly erroneous AI forms or artificially low AI concentrations” in 376 instances which totaled about $17.5 million, according to the staff petition for relief.

Furthermore, the bureau found that roughly 48 of the sales made by LPL advisors led to a concentration in alternative investments that “blatantly exceeded LPL guidelines,” it says. “These 48 unlawful and unsuitable sales totaled approximately $2.4 million.”

The company has 30 days to request a hearing before a hearings officer at the Bureau of Securities Regulation in Concord. If LPL fails to make the request within the set time period, the state can render a default judgement of $3.6 million and revoke the firm’s securities license.

LPL had close to $5 million of regulatory charges in the fourth quarter of 2014. For the year, these expenses were $36.3 million, including fines and restitution. The firm says these charges “were approximately four times” the average level it paid in 2012 and 2013. In the third quarter, the independent broker-dealer paid $23 million in regulatory charges.