Massachusetts Charges SII with Non-Traded REIT Violations
(Updates with comment from LPL spokesman in fourth paragraph.)
SII Investments allowed its independent brokers to inflate clients’ liquid net worth to qualify them to purchase non-traded real estate investment trusts in Massachusetts, the state said on Wednesday.
SII, which is part of the National Planning Holding independent broker-dealer network that LPL is absorbing, sold more than $4 million of the illiquid products to “many” investors who would not have qualified to buy them if their net worth had been properly calculated on suitability and disclosure forms, Secretary of the Commonwealth William F. Galvin charged in an administrative complaint.
SII’s compliance officials also failed to supervise the independent sales agents selling the inappropriate investments, it said.
Spokespeople at SII did not respond to requests for comment. Jeffrey Mochal, a spokesman for LPL, said that “under the construct of our agreement, LPL would not be liable for this matter.”
Nontraded REITs, which are marketed primarily through independent brokers, promise investors high returns, while brokers book high-commissions that can reach 7%. The product has long been a bone of contention between regulators and independent firms. LPL, the biggest independent broker-dealer, in 2015 $1.4 million and remediate losses to investors over nontraditional REIT sales from 2008 to the end of 2015.
Galvin in 2013 reached agreement with to make restitution of about $8.6 million to REIT investors and pay total fines of about $975,000.
SII engaged in dishonest or unethical conduct by skirting a state rule limiting purchase of nontraded REITs to no more than 10% of an investor’s liquid net worth in a single product, the state regulator said on Wednesday. Brokers hiked liquid net worth calculations by including annuities with REIT investments even though the vehicles had “material pending surrender fees,” Galvi charged.
In permitting the calculations, SII also violated its own internal policies and procedures, the state charged.
“A firm must have real and meaningful supervisory procedures to prevent inappropriate sales,” Galvin wrote in a prepared statement. “This firm did not have those and Massachusetts investors suffered. My office will not allow this to happen.”