On October 24, 2017, the New Jersey Bureau of Securities (the “Bureau”) entered into a Consent Order (“Order”) with Boston-based brokerage firm LPL Financial, LLC (CRD# 6413) (“LPL”), in connection with LPL’s sales of certain non-traded investment products to residents of New Jersey. Specifically, the Order encapsulated findings of fact that LPL agents sold to New Jersey clients various non-traded financial products, including non-traded real estate investment trusts (“REITs”), as well as non-traded business development companies (“BDCs”) and other non-traded investments such as closed-end and interval funds, hedge funds, and managed futures.
In particular, the Bureau focused on LPL’s sales of non-traded REITs (some 7,823 transactions) and non-traded BDCs (some 2,120 transactions). Non-traded REITs and BDCs carry considerable risks, chief among them their illiquid nature (often, investors are not fully aware at the time of purchase that exiting the investment could be problematic). As stated in the Bureau’s Order: “Non-traded REITs and non-traded BDCs are generally illiquid as they have no public trading market and a liquidity event typically occurs within five to seven years of an offering’s inception.”
Aside from liquidity concerns, there are numerous additional risks associated with non-traded financial products, including but not limited to characteristically high up-front fees charged investors (commissions to brokers and their firm run as high as 10%, as well as certain due diligence and administrative fees that can range up to 3%), as well as the fact that many non-traded REITs and BDCs pay distributions from investor capital (return of capital). This return of capital may confuse some investors who believe that the investment’s yield is based on positive earnings and cash flows.