In the nontraded REIT world, regulators have typically focused on broker-dealers and their sales policies and procedures. Until last week. Is Finra's recent action a cautionary tale for advisers?
The Financial Industry Regulatory Authority Inc. last week barred a former LPL Financial broker for several violations of securities industry rules, including falsifying documents, related to the sale of nontraded real estate investment trusts from 2009 to 2012.
The broker, Gary Chackman, was registered with LPL from 2001 to 2012, when LPL terminated his registration for violation of the firm's policies and procedures relevant to the sale of alternative investments, according to his BrokerCheck report.
This year, securities regulators have given increased attention to sales of nontraded REITs, one of the hottest products sold through independent broker-dealers. REIT sales this year are set to double by comparison with last year, with industry bankers and analysts estimating close to $20 billion in sales.
Nontraded REITs are high-commission products, typically paying registered representatives a sales commission of 7%. Regulatory action, however, has focused on broker-dealers and their sales policies and procedures concerning the product.
This year, the Massachusetts Securities Division reached settlement agreements with six broker-dealers for $21.6 million in restitution to clients over sales of nontraded REITs. The firms, including LPL, have paid fines of close to $1.5 million.
The restitution and fines were related to instances in which clients of brokers affiliated with the firms had more than 10% of their liquid net worth invested in nontraded REITs, a violation of Massachusetts rules.
Actions such as Finra's against an individual rep such as Mr. Chackman, however, have been rare.
Although Finra's Department of Enforcement has a number of complaints pending against reps that allege misrepresentations in the sale of nontraded REITs, Finra barred just one other broker this year due to misrepresentations in the sale of the product, according to a scan of online Finra disciplinary actions.
Mr. Chackman “recommended and effected unsuitable transactions in the accounts of at least eight LPL customers, by overconcentrating his customers' assets in [REITs] and other illiquid securities,” according to the Finra letter of acceptance, waiver and consent, dated Dec. 12.
“Additionally, Chackman falsified LPL documents to evade the firm's supervision and caused the firm's books and records to be inaccurate by submitting dozens of 'alternative investment purchase' forms that misrepresented his customers' purported liquid net worth," according to the letter.
A telephone number for the Chackman Financial Group in Pikesville, Md., was disconnected.
Mr. Chackman's BrokerCheck report lists three arbitration claims with settlement amounts of $747,000. He also faces a pending Securities and Exchange Commission investigation, according to the BrokerCheck report.
LPL spokeswoman Betsy Weinberger on Thursday said: “When we became aware of Mr. Chackman's activity, we moved promptly to terminate him and took the necessary steps to improve systems to prevent similar misconduct in the future.”
Mr. Chackman, by submitting falsified documents, “was able to increase his customers' accounts' concentration in REITs and other alternative investments beyond the allocation limits established by” LPL, according to the Finra settlement letter.
The overconcentration in client accounts occurred from July 2009 to February 2012, according to Finra.
For example, one of Mr. Chackman's clients made seven purchases of one REIT, each for $75,000, over six months. After a year, 35% of the client's assets and 25% of her liquid net worth were invested in REITs and other alternative investments.
Another client made seven purchases of the same REIT, totaling $135,000, over seven months.
After about two years, that client had more than one-third of his liquid net worth in REITs and other alternative investments, according to Finra.
