LPL hit with Finra fine for alternative investment sales

Products include nontraded REITs, oil and gas partnerships, BDCs, hedge funds and managed futures

Mar 24, 2014 @ 10:35 am

By Bruce Kelly

LPL Financial once again is in trouble with regulators for deficiencies in supervision of sales of alternative investments, including nontraded real estate investment trusts.

The Financial Industry Regulatory Authority Inc. on Monday said that it has fined LPL Financial $950,000 for supervisory deficiencies related to sales of a wide range of alternative investment products. These include nontraded REITs, oil and gas partnerships, business development companies, hedge funds, managed futures and other illiquid investments.

Alternative investments, including REITs, have concentration limits for investors in their offering documents. Also, some states have imposed concentration limits.

(Can you guess what hurt LPL's recruiting?)

LPL Financial also has established its own concentration limits, according to Finra.

The company has spent the past year and a half tangling with securities regulators over its former sales policies of nontraded REITs, which have had a boom in sales over the past couple of years.

In December 2012, Massachusetts Secretary of the Commonwealth William Galvin sued LPL Financial over the sales practices of its brokers regarding the REITs. He charged LPL Financial with failure to supervise registered representatives who sold the nontraded REITs in violation of both state limitations and the company's rules.

LPL Financial was one of a half dozen broker-dealers that eventually settled with Mr. Galvin and the Massachusetts Securities Division over the sales practices. LPL agreed to pay $4.8 million in restitution to clients.

In Monday's settlement, in which LPL Financial neither admitted nor denied the charges, Finra found that from Jan. 1, 2008, to July 1, 2012, the company failed to adequately supervise the sales of alternative investments that violated these concentration limits.

“LPL is pleased to have resolved this matter following an investigation in which we cooperated fully with Finra staff,” according to a company statement provided by company spokeswoman Betsy Weinberger.

“When the firm became aware of misconduct by the referenced financial adviser in his nontraded real estate investment trust transactions, the firm promptly terminated the adviser. He has been barred from the industry,” Ms. Weinberger said.

(See also: LPL recorded record revenue of $4.1 billion in 2013)

“Beginning in 2012, LPL Financial began a rigorous review of the firm's supervisory policies and procedures regarding the processing and sale of alternative investments, including nontraded REITs,” according to the statement. “We believe that the enhancements we have since made 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.”

This is the second time in the past year that LPL Financial has faced a significant fine from Finra.

Last March, Finra said that it fined LPL Financial $7.5 million for 35 separate significant e-mail system failures.

LPL Financial also made misstatements to Finra during its investigation of the failures. The company was ordered to create a $1.5 million fund to compensate brokerage firm customers potentially affected by its failure to produce e-mail.

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