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LPL Fined by State of NH for Alleged Unsuitable REIT Sales

For some time we have been blogging about non-traded REITS (and the real risks associated with investing in these complex investment vehicles.  Many investors are familiar with exchange traded Real Estate Investment Trusts (“REITs”).  Pursuant to federal law, these companies which own and typically operate income-producing real estate, are required to distribute at least 90% of their taxable income to investors in the form of dividends.  Because REITs pay out such a high percentage of their taxable income as dividends, these companies have attracted numerous retail investors (including pensioners and other retirees) seeking to augment their income stream.

15.6.15 money whirlpool

While an appropriate allocation of REITs in a retail investment portfolio may well be suitable and warranted in order to achieve diversification and earn decent income, non-traded REITs are an altogether different and often risky investment vehicle.  The primary risks associated with non-traded REITs include: (1) a lack of liquidity – non-traded REITs do not trade on an exchange, and therefore, any secondary market for resale will be restricted; (2) pricing inefficiency – in lockstep with their lack of liquidity, investors in non-traded REITs may find that the price offered for share redemption is substantially lower than the price at which shares were initially purchased;  (3) high up-front fees – compounding the risk with non-traded REITs are the often steep up-front fees charged investors (as high as 10% for selling compensation) simply to buy in and purchase shares; and (4) confusion over source of income – often, investors in non-traded REITs are unaware that dividend income may actually include return of capital (including possible the proceeds from sale of shares to other, later investors).


In April 2015, the New Hampshire Bureau of Securities Regulation (the “Bureau”) initiated a regulatory proceeding against LPL Financial (“LPL”) in connection with the Boston-based brokerage firm’s sale of non-traded REITs to numerous investors.  Aware of their complex nature and risks, the Bureau alleged that sales of non-traded REITs to New Hampshire residents were unsuitable under the circumstances and that LPL failed to properly supervise its associated members selling the non-traded REITs.

The case involved an elderly resident of New Hampshire, age 81, who was steered into investing approximately $250,000 in a non-traded REIT by an LPL adviser.  The investor ultimately suffered significant losses in the non-traded REIT.  During the course of its investigation into the matter, the Bureau concluded that LPL sold hundreds of non-traded REITS to New Hampshire residents, often in clear violation of LPL’s own internal policies and guidelines.  LPL allegedly failed to follow its own guidelines concerning gathering accurate financial information from clients, ensuring appropriate concentration in any alternative investments such as non-traded REITs, and conducting a suitability analysis in connection with sales to investors.

As a result of the Bureau’s investigation into LPL, the Boston-based brokerage firm agreed to pay a fine of $750,000 for its alleged misconduct.  Furthermore, LPL agreed to allow for a third-party review of its non-traded REIT sales in order to determine whether and in what amount restitution was warranted.

As of April 2017, based on this third-party review, LPL is responsible for refunding roughly 200 New Hampshire residents who had invested in non-traded REITs in the aggregate amount of $8 million (approx. $40,000 per client).


If you have invested in a non-traded REIT that you believe was unsuitably recommended, and you have suffered significant losses as a result, you may be able to recover your losses in FINRA arbitration.  To find out more about your legal rights and options, contact a securities arbitration lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or for a no-cost, confidential consultation.


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