Español Inner
Published on:

New Jersey Regulators Fine LPL Financial Over Non-Traded REIT Sales


Building Demolished 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.

According to the prospectus of one non-traded REIT referenced in the Order, an investor’s total capital commitment could not exceed 10% of the investor’s liquid net worth pursuant to State of New Jersey heightened suitability standards.  Despite these clearly stated standards designed to protect investors from the risks associated with these non-traditional or alternative investments, the Bureau alleged that one investor with a liquid net worth of $350,000 committed nearly $70,000, or 20% of the investor’s net worth, to an illiquid non-traded REIT.  Similarly, the Bureau alleged that another LPL client had invested approximately 13% of their liquid net worth in a non-traded BDC, despite the investment’s prospectus clearly delineating against allowing an investor to commit more than 10% of their liquid net worth.

As a result of the Bureau’s investigation into LPL, the Boston-based brokerage firm agreed to pay a fine of $950,000 for its alleged misconduct, as well as payment in the amount of $25,000 to a New Jersey investor education fund.   The Bureau also alleged that LPL failed to follow its own supervisory procedures, and failed to maintain adequate books and records.  Finally, as part of the Order, LPL agreed to undertake a remediation program aimed at reviewing certain non-traded REIT and BDC transactions for the purpose of contacting New Jersey investors who may wish to accept an offer of remediation and tender their existing shares or units back to LPL, as a precondition of payment by LPL to the impacted investor.

If you have invested in a non-traded REIT or BDC, or similar illiquid non-traded financial product, and you have suffered losses as a result (or are currently unable to exit your illiquid investment position), you may be able to recover your losses in FINRA arbitration.  Investors may 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.

Contact Information