The New Jersey Bureau of Securities has entered an Administrative Consent Order making findings against LPL Financial and assessing a civil penalty of $950,000 for LPL’s unsuitable sales of alternative investments including non-traded real estate investment trusts (REITs), non-traded business development companies (BDCs), and other non-traded (and therefore illiquid) investments.
The Bureau found that LPL failed to supervise the sales of these illiquid alternative investments and sold them to investors for whom the investments were unsuitable. The New Jersey Prospectus Suitability Standards for one of the non-traded REITs involved limited investment to 10% of the investor’s liquid net worth, yet the client’s LPL investment represented close to 20% of the client’s liquid assets. The Bureau also noted other investments which were likewise excessive as a percentage of the clients’ net worth.
Non-traded REITs pool investor capital to purchase portfolios of investments in real estate properties. Unlike REITs which trade on a national securities exchange, non-traded REITS (as their name implies) are not publicly traded and are, therefore, difficult to value and carry significant illiquidity risk. These types of REITs also carry tax consequences and early redemption fees, of which an inexperienced investor may be unaware.
Non-traded REITs typically come with high fees and commissions, which make them attractive products for brokers, even though a non-traded REIT would be a suitable investment for only a small percentage of a broker’s clientele. In this instance, LPL received gross sales commission of up to 10% from sales of the alternative investments at issue.
If you or someone you know was a customer of LPL in New Jersey and lost money as a result of an illiquid alternative investment, please call the Frankowski Firm at 888.741.7503 or fill out this contact form.