Galvin charges that SII failed to adequately supervise the sale of nontraded REITs to customers. As a result of the settlement, any Massachusetts investor who was identified by Mr. Galvin’s office as having been improperly sold the REITs by SII will be offered their money back. While this conduct may have occurred in other states, only Massachusetts investors are affected by the action by Galvin’s office (and other investors will not receive a refund as a result of this action).

Of note, the Massachusetts action focused on SII treating clients’ annuities as liquid assets rather than nonliquid assets for purposes of calculating the amount of the client’s assets that could be invested in non-traded REITs: “SII’s suitability and disclosure form for nontraded REITs stated that no more than 10% of an investor’s liquid net worth may be invested in any particular nontraded REIT… While SII’s own internal policies made clear that annuities are illiquid products, SII nevertheless included annuities with substantial pending surrender fees as liquid for nontraded REIT liquid net-worth calculations.”

Mr. Galvin reportedly stated as follows in announcing his office’s action: “SII allowed its agents to miscalculate the customer’s liquid net worth in order to sell them high-commission nontraded REITs in violation of Massachusetts guidelines and its own policies.” As part of the settlement, SII also agreed to pay a $50,000 fine. Last year, Massachusetts charged SII Investments with “dishonest or unethical conduct and failure to supervise” sales of nontraded real estate investment trusts (REITs) to investors by inflating clients’ liquid net worth. LPL Financial bought SII in 2017 from an insurance company as part of its acquisition of the assets of National Planning Holdings, a network of four broker-dealers.

Non-traded REITs are investments that are frequently not adequately explained by the financial advisors recommending them. To begin, non-traded REITs are typically characterized by very high fees and up-front commissions (as high as 15% in some instances). Aside from their high fee structure, non-traded REITs are illiquid in nature, and usually cannot readily be sold for a number of years after purchase. Unlike traditional stocks and mutual funds, non-traded REITs do not trade on a deep and liquid national securities exchange. Therefore, many investors in non-traded REITs come to learn too late that their ability to exit their investment position is limited. For instance, non-traded REIT investors typically can only redeem shares directly with the sponsor on a limited basis, and even then, often at a disadvantageous price. Economic research shows that non-traded REITs have consistently underperformed publicly-traded REITs, which feature much lower fees and commission and can be freely sold by investors on the open market.

The attorneys at Law Office of Christopher J. Gray, P.C. have significant experience in representing investors who have incurred losses in connection with non-traded REITs and other investments. Investors may contact a securities arbitration attorney at (866) 966-9598 or via email at newcases@investorlawyers.net for a no-cost, confidential consultation.

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 newcases@investorlawyers.net for a no-cost, confidential consultation.