The New Jersey Bureau of Securities has ordered LPL Financial LLC, the nation’s largest independent broker-dealer, to pay a $950,000 fine and an additional $25,000 to the state investor education fund for improper sales of non-traded real estate investment trusts and business development companies.
Generally, the New Jersey prospectus suitability standards restricts the sale of certain illiquid alternative investments based on a client’s liquid net worth, or a combination of a client’s income and net worth. The state also limits the total percentage of alternative investments held to not exceed 10 percent of an investor’s entire portfolio.
LPL maintains its own guidelines on alternative investments, such that a client under the age of 70 with a liquid net worth below $999,999 and an investment objective of “growth” would be allowed a 20 percent concentration in alternative investments.
New Jersey alleged that LPL not only failed to supervise the sale of alternatives by its brokers, but also violated the New Jersey prospectus suitability standards and failed to follow its own supervisory procedures regarding the offer and sale of such investments.
In one instance, a 54-year-old LPL client with a $245,000 liquid net worth and a “growth” investment objective had nearly 33 percent of their investment portfolio concentrated in non-traded REITs.
Although the suitability standards vary slightly from program to program, one non-traded REIT prospectus maintains that New Jersey investors must have either a minimum liquid net worth of at least $100,000 and a minimum annual gross income of not less than $85,000, or a liquid net worth of at least $350,000.
New Jersey detailed multiple instances where LPL clients either did not qualify to invest in alts based on their liquid net worth, or had exceeded the concentration limits set by both the state and LPL.
In addition, LPL previously notified its brokers that if a client has existing Al holdings, the net worth should be higher than the liquid net worth by at least the amount of those holdings. However, the New Jersey Securities Bureau found that some brokers failed to properly account for existing AI holdings.
One LPL client’s liquid net worth and net worth were listed as the same amount of $1.2 million, even though the client held a $103,000 investment in a non-traded BDC. Because of their illiquid nature, if a client already owned alternative investments, then their liquid net worth and net worth could not be the same.
The New Jersey Securities Bureau also identified instances in which client financial information was amended to comply with LPL’s guidelines. In these instances, after a transaction was rejected by LPL, the form was resubmitted with changed information and later approved by a LPL supervisory principal. Although many of the changes were apparently initialed by the client, LPL allegedly did not retain any additional documentation regarding the change in the customer’s account profile.
LPL will undertake a remediation program to review the non-traded REIT and BDC transactions and offer to repurchase those that were sold to New Jersey investors in violation of its own guidelines and the state’s prospectus requirements.
According to the consent order, LPL cooperated with the investigation and voluntarily designed and implemented supervisory system and control enhancements relating to the sale of alternative investments.
While LPL does not admit or deny the findings, it agreed to the consent order and will pay the nearly $1 million fine.