By Katia Ramundo
On March 24, FINRA announced that it hit LPL Financial with a fine of $950,000 for supervisory deficiencies in the sales of alternative investments. According to FINRA, the deficiencies are related to sales of a broad range of products, including non-traded REITs, oil and gas partnerships, business development companies, hedge funds, managed futures, and other illiquid investments.
FINRA found that between January 1, 2008, and July 1, 2012, LPL Financial violated NASD Rule 3010(a) and 3010(b), NASD Rule 2110 and FINRA Rule 2010 by failing to properly supervise the sale of alternative investments that violated investor concentration limits set forth both at the state level and by LPL itself. LPL created its own automated review system, but the database was not frequently updated to accurately reflect suitability standards. This often meant relying on outdated and inaccurate information. FINRA also stated that LPL failed to adequately train its supervisory staff to properly analyze state standards within their suitability reviews of such products.
REITs, and other alternative investments, may be good for the sales representative, but this does not mean they are suitable for every investor. Various securities regulators have been scrutinizing non-traded REITs sales at LPL for the past year and a half. The firm was one of the six broker-dealers that eventually settled with the Massachusetts Secretary of State and the Massachusetts Securities Division over these sales practices, agreeing to pay $4.8 million in restitution to clients.
REITs are of interest to investors because of their high dividend yield, simple tax treatment, and diversification. However, investors should be cautious of these selling points and balance them against numerous risks and complexities that these investments carry. The values of the REIT shares and dividends depend on the strength of the real estate market. In a bad commercial real estate market, rising vacancy rates would cut into income collected by the REIT, which would reduce the size of dividends offered. FINRA warns that older investors should be particularly cautious about investing large portions of their retirement income in non-traded REITs because the initial investment in a non-traded REIT is not guaranteed and may increase or decrease in value at any time.
Before investing in REITs and various other alternative investments, investors should properly assess their risks. FINRA has started to help underserved investors that have been improperly placed in these highly volatile investments, but investors should also do their part by staying informed. Investors should always inspect a REIT’s website, stay updated on the REIT’s dividend payment history and fees, and should also read the REIT’s prospectus.