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February 8, 2013

LLC Subject to Massachusetts Consent Order For Unethically Selling Non-Traded REITs to State Residents

By Jay Fishman, J.D.

The Massachusetts Securities Division (Division), on February 6, 2013, entered into a consent order with a limited liability company (company) after the company's representatives sold non-traded real estate investment trusts (REITs) to Massachusetts residents in violation of Massachusetts unethical practice provisions. The company, an SEC-registered broker-dealer and federal covered investment adviser, upon specifically violating Massachusetts' maximum 10-percent concentration limit on non-traded REITs, violating non-traded REIT prospectus-prescribed net worth and annual income suitability standards, and not complying with its own supervisory procedures, agreed to: (1) cease and desist from violating the Massachusetts Securities Act and rules; (2) be censured by the Division; (3) pay back the residents' invested money under an offer of restitution; and (4) pay an administrative fine in the amount of $500,000.

The company's registered agents and investment adviser representatives, from 2006 to 2011 when the Division received its first resident-investor complaint, sold over $2 million worth of non-traded REITs to Massachusetts residents, the purchase amount for many of them exceeding 10 percent of their net worth in violation of Massachusetts' concentration limit imposed by non-traded REIT prospectuses. Similarly, the amount of non-traded REITs bought by residents exceeded the minimum net worth and annual gross income suitability standards that REIT prospectuses required the residents to have.

The non-traded REIT transactions were also made without complying with the company's own written supervisory procedures, a violation of Massachusetts' unethical practice provision on supervision. The Division's deposition testimony revealed that the company's designated supervisors failed to formally train their representatives on non-traded REITs, including how to read a REIT prospectus, leaving that responsibility to senior management who also never trained them. The representatives testified they learned what they could about non-traded REITs from Googling articles and attending cursory PowerPoint presentations.

By 2011, Massachusetts resident-investors were complaining to the Division that they could not exit their REIT positions without selling at a tremendous discount. They alleged that the representatives told them REITs are stable, principal-preserving, income- generating investments without much mentioning the illiquidity of REITS or that REITS are not listed on public securities exchanges, provide few disclosures, and have lengthy holding periods, variable withdrawal periods, and restricted redemption options.

Companies: LPL Financial LLC

LitigationEnforcement: Enforcement BrokerDealers InvestmentAdvisers MassachusettsNews

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