Galvin orders SII to pay restitution on nontraded REIT sales

LPL bought SII last year as part of its National Planning Holdings purchase

Sep 7, 2018 @ 1:51 pm

By Bruce Kelly

Massachusetts Secretary of the Commonwealth William Galvin banged away Friday on another independent broker-dealer for sales of nontraded real estate investment trusts, this time ordering SII Investments Inc. to pay money back to clients who bought the REITs.

SII failed to supervise the sale of the nontraded REITs, according to a statement from Mr. Galvin's office. 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.

Last year, Mr. Galvin's office 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 as part of its purchase of National Planning Holdings, a network of four broker-dealers owned by Jackson National, an insurance company. Insurers have been dumping their broker-dealers for the past decade due to the risk and high cost of business.

LPL's deal for NPH was structured in what is commonly referred to in the securities industry as an "asset purchase," meaning LPL acquired the right to recruit advisers from the NPH broker-dealer network. As part of the transaction structure, historical liabilities of those broker-dealers remained the responsibility of NPH.

Jeff Mochal, a spokesperson for LPL, declined to comment. A spokesperson for Jackson National, Melissa Hernandez, did not return a call to comment.

Nontraded REIT sales have been the focus of Mr. Galvin's office in the past. In 2013, his office said five broker-dealers agreed to pay close to $17 million in restitution to clients who bought nontraded REITs from 2005 to the present. In a separate settlement that same year, LPL was ordered to set aside $2 million to pay restitution to clients who bought nontraded REITs.

Last year's complaint by Massachusetts against SII said that, for the past few years, "SII's poorly designed policies and procedures resulted in thousands of dollars worth of nontraded REITs being sold by SII agents to unwitting clients."

Mr. Galvin's order centered on SII counting clients' annuities as liquid rather than nonliquid assets.

"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," according to Mr. Galvin. "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.

"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," Mr. Galvin said in a statement. "SII put its own interests ahead of the customers — yet another example of the need for a strong fiduciary rule to be adopted."

As part of the settlement, SII also agreed to pay a $50,000 fine.


What do you think?

View comments

Recommended for you

B-D Data Center

Use InvestmentNews' B-D Data Center to find exclusive information and intelligence about the independent broker-dealer industry.

Rank Broker-dealers by

Featured video


These are the federal and state rules that will most impact 401(k) advisers

Will Hansen, chief governmental affairs officer for the National Association of Plan Advisors, discusses regulation and legislation poised to have the biggest impact on advisers.

Latest news & opinion

IBD report: Another impressive year

Despite a stock market decline, revenue is up. And the streak isn't expected to end anytime soon.

IBDs with the most CFPs

How many of the more than 83,000 certified financial planners are employed by the big independent broker-dealers?

Richard Thaler wants to use 401(k)s to boost Social Security payments

The Nobel laureate wants to simplify drawing down retirement assets, which he thinks is 'way harder' than saving the money.

InvestmentNews announces 2019 Innovation Awards winners

Sheryl Garrett is this year's InvestmentNews Icon.

Morgan Stanley rides wealth management train to solid first quarter

Chairman and CEO James Gorman expresses excitement about expanding into workplace plans with purchase of Solium.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print