LPL Financial agrees to pay New Jersey Bureau of Securities $975,000 to Resolve Violations Relating to Sales of Alternative Products
NEWARK – Attorney General Christopher S. Porrino and the Division of Consumer Affairs today announced that a Boston financial firm with branch offices in New Jersey has agreed to pay $975,000 to resolve a Bureau of Securities investigation into the sale of several types of alternative investments, including non-traded real estate investment trusts (REITs) and non- traded business development companies (BDCs), in New Jersey.
In a Consent Order signed October 24, LPL Financial, LLC, agreed to pay $975,000 to resolve the Bureau’s findings that the company’s agents sold alternative investments that were unsuitable for certain investors, did not reasonably supervise those sales, and did not keep required books and records. These alternative investments are complex products that are not traded on any exchange and that have a limited secondary market, making it difficult for investors to sell them if needed.
“This substantial settlement with LPL Financial sends a message that the securities industry cannot sell unsuitable investments to clients who are unlikely to be able to bear the financial risks,” said Attorney General Christopher S. Porrino. “The standards governing sales of alternative investments are in place to protect investors, and the Bureau will take action when these standards are ignored.”
The Bureau reviewed 7,823 alternative investment transactions representing sales to approximately 4,307 New Jersey clients over the course of several years by LPL’s agents. There were at least 95 different alternative investment offerings, but the majority of the transactions were REITs or BDCs.
REITs, which own and manage income-producing real estate, and BDCs, which invest in small and mid-sized businesses, were in this case illiquid investments that could not be sold in the securities markets. At least 56 of the alternative investment offerings sold by LPL agents during the review period were registered with the Bureau conditioned upon heightened suitability standards for sales to New Jersey residents (New Jersey Prospectus Suitability Standards). These New Jersey Prospectus Suitability Standards are required to be disclosed in, among other places, the prospectus and the subscription agreements.
The Bureau’s investigation found that LPL agents sold numerous REITs and BDCs in violation of the New Jersey Prospectus Suitability Standards or in violation of LPL’s own internal guidelines. The Bureau also found that LPL disregarded its own policies concerning the offer and sale of alternative investments and failed to keep required books and records.
“Because of their illiquidity and risks, alternative products are not suitable for all investors,” said Sharon Joyce, Acting Director of the Division of Consumer Affairs. “Broker-dealers have an obligation to carefully screen prospective investors to make sure these securities meet their clients' investment objectives.”
Additionally, LPL is required to review the REIT and BDC transactions during the relevant time period and offer to repurchase from investors those investments sold in violation of LPL’s own internal guidelines or the New Jersey Prospectus Suitability Standards.
“As part of the settlement, LPL has agreed to offer remediation to New Jersey residents that were sold alternative investments in violation of suitability standards,” said Christopher W. Gerold, Chief of the Bureau of Securities. “Numerous New Jersey residents will be provided the opportunity to recover the amount that they paid for their investments.”
The Bureau's action was handled by Deputy Chief Amy Kopleton, Director of Examinations Stephen Bouchard, and former Investigator Scott Haggmark, of the Bureau of Securities, within the Division of Consumer Affairs.
The Bureau thanks Assistant Attorney General Brian F. McDonough, Section Chief Victoria Manning, and Deputy Attorney General Isabella Stempler of the Securities Fraud Prosecution Section of the Division of Law for their assistance in this matter.
The Bureau is charged with protecting investors from investment fraud and regulating the securities industry in New Jersey. It is critical that investors "Check Before You Invest." Investors can obtain information, including the registration status and disciplinary history, of any financial professional doing business to or from New Jersey, by contacting the Bureau toll-free within New Jersey at 1-866-I-INVEST (1-866-446-8378) or from outside New Jersey at (973) 504-3600, or by visiting the Bureau's website at
www.NJSecurities.gov. Investors can also contact the Bureau for assistance or to raise issues or complaints about New Jersey-based financial professionals or investments.