Friday, December 14, 2012

Massachusetts Sues LPL over Non-Traded REITS

The Massachusetts Securities Division sued LPL FInancial on December 12, 2012 for improper practices over the sale on non-traded REITS.

Here is a link to the complaint.

AdvisorAssist Analysis:
The compliant mostly focuses on three key areas:

  1. When there is a conflicts of interest between the broker(rep) and the Client, disclosure and suitability are critical and must be properly performed and documented. The complaint notes that “non-traded REITS are especially risky through limited redemption programs, high fees and commissions, and internal conflicts of interest.” Further, it questions LPL's supervision stating that although LPL did have “stringent requirements” for the sale of these non-traded REITs, LPL “failed to review properly sales” to ensure they did not represent a material portion of a retail investors assets (10% of assets).
  2. Failure to properly train its supervisory staff with respect to these instruments, including prospectus and suitability requirements.

This complaint points out one key issue that is not just an LPL specific issue. Remote supervision is tough!It is a challenge whether you have a single offsite advisory person or thousands or affiliated personnel. Firms must establish the appropriate controls, workflows and validations. For instance, we believe every firm that has more than one person should have an account approval process. Further, an Investment Committee and notes on security analysis can be very helpful in demonstrating due diligence. Lastly, fiduciary duty and suitability are not one-time events. Firms should enhance their technology (CRM or reporting systems) to make this continuous review manageable.

If you have questions on how to implement these controls, please contact us at


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