By Matthias Rieker
Wall Street's self-regulator fined LPL Financial LLC $950,000
for inappropriate sales of several types of alternative
investments, including nontraded real-estate investment trusts, to
its clients.
LPL, the nation's largest network of independent brokers, was
among several brokerages who were fined by Massachusetts regulators
in a similar case focused on nontraded-REIT sales. Despite certain
risks, nontraded REITs have become an increasingly popular
investment in recent years, particularly among people seeking
income.
In a news release Monday, the Financial Industry Regulatory
Authority Inc. said LPL failed to ensure that clients didn't put
too much of their savings into nontraded REITs, oil and gas
partnerships, business development companies, limited partnerships,
hedge funds or other alternative investments.
Several states, and LPL itself, have set limits on how much of a
client's portfolio can be committed to these riskier forms of
investments, but LPL failed to see that the limits were always
observed, Finra said. Between 2008 and 2012, LPL initially used a
manual process that relied on outdated information to review
whether an investment complied with suitability requirements, Finra
said. The firm later implemented an automated system for review,
but that database contained flawed programming, the regulator
said.
"LPL exposed customers to unacceptable risks by not having an
adequate system in place," Finra enforcement chief Brad Bennett
said. "It failed to train its registered representatives to apply
all the suitability guidelines appropriately." While neither
admitting nor denying the charges, LPL consented to the fine.
Last May, Massachusetts regulators fined LPL $500,000 and
ordered the firm to pay $4.8 million in restitution to clients for
violating a state rule that an investor's purchase of REITs can't
exceed 10% of the investor's liquid net worth.
The LPL penalty was part of more than $11 million the
Massachusetts regulator's office collected in restitution and fines
from six firms related to REIT sales: LPL, Ameriprise Financial
Inc., Lincoln National Corp., Commonwealth Financial Network, Royal
Alliance Associates and Securities Americas.
LPL said it already improved supervision, revised its
alternative investment guidelines, enhanced the criteria used to
identify risky transactions, and hired a consultant to review its
systems. It fired a financial adviser who sold nontraded REITs, the
firm said.
A spokeswoman for LPL said the changes "significantly strengthen
our ability to review the suitability of these transactions and
ensure that sales of these products in the future comply with all
applicable requirements."
"LPL is pleased to have resolved this matter," she said.
Write to Matthias Rieker at matthias.rieker@wsj.com
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