As recently reported, on September 20, 2017, the Enforcement Section of the Massachusetts Securities Division (the “Division”) filed an Administrative Complaint (“Complaint”) against SII Investments, Inc. (“SII”) (CRD# 2225) in connection with the brokerage firm’s marketing and sales of non-traded REITs to certain Massachusetts investors. SII is an independent broker-dealer within National Planning Holdings, which was recently acquired by Boston-based LPL Financial.
The Complaint essentially alleges that for the past several years, SII has engaged in “[d]ishonest and unethical conduct and failed to supervise its agents by allowing systemic inflation of its clients’ liquid net worth while maintaining contradictory and unclear rules related to the purchase of non-traded real estate investment trusts… .” Of significance, Massachusetts securities regulations mandate that “[n]o more than 10% of a client’s liquid net worth can be concentrated in one specific non-traded REIT and no more than 20% of a client’s liquid net worth can be concentrated in non-traded REITs in general.”
According to the Complaint, SII’s own internal policies and procedures also would also appear to have been violated by some of SII’s alleged conduct. For example, on SII’s own suitability and disclosure forms used for the sales of non-traded REITs, the full value of variable annuity products was listed as part of a client’s liquid net worth. However, as referenced in the Complaint, SII’s own “[C]ompliance Guide states ‘There must not be any representation or implication that variable annuities are short-term, liquid investments. Presentations regarding liquidity or ease of access to investment values must be balanced by clear language describing the negative impact of early redemptions.’”
In aggregate, the Division has alleged that from 2011-2016, SII sold 93 non-traded REITs to Massachusetts investors with a value of approximately $4.7 million. In bringing the Complaint, the Division is seeking, among other relief, to permanently enjoin SII from any further alleged conduct in violation of the Massachusetts Uniform Securities Act (the “Act”), requiring SII to provide an accounting of investor losses attributable to the alleged wrongdoing, and requiring SII to make written offers of rescission to all Massachusetts residents who purchased securities that were sold in violation of the Act.
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 are complex investment products that often 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.
If you have invested in a non-traded REIT, 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 if the investment recommendation by a stockbroker or financial advisor lacked a reasonable basis. Investors may contact a securities arbitration lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or firstname.lastname@example.org for a no-cost, confidential consultation.