By Suzanne Barlyn
Feb 6 LPL Financial LLC will pay up to $2.5 million to settle allegations by Massachusetts' securities regulator that it failed to supervise its brokers who sold investments in nontraded real estate investment trusts, according to a settlement announced on Wednesday.
Secretary of the Commonwealth William Galvin said the unit of LPL Financial Holdings Inc would offer restitution of $2 million to Massachusetts investors who bought seven nontraded REITs that were the subject of an administrative complaint filed against the company in December.
LPL also agreed to pay a $500,000 administrative fine.
"LPL worked cooperatively with the Commonwealth of Massachusetts to promptly and appropriately resolve all of the issues, and we are glad to put this matter behind us," the company said in a statement. It neither admitted nor denied the alleged violations, according to the consent order.
REITs invest in commercial real estate, such as hotels and strip malls, allowing investors to profit from rising property values. Nontraded REITs, which do not trade on securities exchanges, can be illiquid or difficult to sell in secondary markets. Nontraded REITs also often have higher fees for investors than publicly traded REITs.
The Massachusetts probe focused on seven nontraded REITs sold by LPL brokers. Officials alleged that some sales violated state regulations barring more than 10 percent of an investor's net worth from being held in certain securities. Other transactions violated liquid net worth requirements for investors set out in the REIT prospectuses, the state alleged.
Brokers and LPL employees responsible for reviewing the transactions were "under-educated and under-supervised with respect to nontraded REIT transactions," according to the complaint.
The settlement requires that certain LPL customers, at their discretion, have an opportunity to sell their shares of non-traded REITs to LPL for the price they originally paid, LPL said in a statement.
LPL also agreed in the settlement to review all other nontraded REITs it offers to Massachusetts residents and make restitution to investors in the state whose transactions violated Massachusetts or company rules.
It is unclear how that review process will work or how much LPL will have to pay upon completion. The findings and figures, however, will be subject to review by Secretary Galvin's office, his spokesman said.