When Will Firms Finally Learn to Stay Clear of Nontraded REITs and Massachusetts Regulators?

[ by Howard Haykin ]

LPL Financial agreed to settle with the Massachusetts securities regulator over charges that it failed to supervise its brokers who sold investments in nontraded real estate investment trusts.  Secretary of the Commonwealth William Galvin said the unit of LPL Financial Holdings Inc would offer restitution of $2 million to Massachusetts investors who bought seven nontraded REITs that were the subject of an administrative complaint filed against the company in December.  Add to that a $500,000 administrative fine, and the total cost to the firm is $2.5 million.  LPL cooperated fully and expeditiously with the state regulator to appropriately resolve all of the issues.

REITs invest in commercial real estate - e.g., hotels and strip malls - allowing investors to profit from rising property values.  When a REIT is "nontraded," that means its shares or units do not trade on securities exchanges - causing such investments to be illiquid or difficult to sell in secondary markets. The fees on nontraded REITs are also higher than those an investor would pay when dealing with publicly-traded REITs.

Massachusetts Findings and Allegations.   The investigation focused on 7 nontraded REITs sold by LPL brokers.  Officials found that some sales violated state regulations, which bar more than 10% of an investor's net worth from being held in certain securities.  Other transactions violated liquid net worth requirements for investors set out in the REIT prospectuses, the state alleged.

According to the complaint, LPL brokers and supervisory personnel who are responsible for reviewing the transactions, were "under-educated and under-supervised with respect to these securities products.

In addition to the $2.5 million financial sanctions noted above, LPL Financial agreed to review for any other non-traded REITs that its brokers have sold to Massachusetts residents, and to offer restitution to those investors whose transactions violated Massachusetts or company rules.

For further details, go to [Reuters, 2/6/13].