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Alleged Alternative Sales Violations Cost LPL Another $3.3 Million

LPL Financial agreed to pay almost $3.3 million to settle allegations from multiple state securities regulators claiming the independent broker-dealer improperly sold non-traded REITS and leveraged ETF products to investors.

To settle allegations the firm failed to adequately supervise or enforce safeguards on the sale of non-traded REITS, LPL will pay a $1.425 million civil fine that will be distributed among 48 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands under an agreement with the North American Securities Administrators Association’s Non-Traded REIT Task Force.

LPL Financial reached a separate settlement with the Massachusetts Attorney General and the Delaware Attorney General, to pay a $1.8 million fine for violations stemming from the firm’s sales, marketing, training, and oversight relating to risky leveraged Exchange Traded Funds.

The $1.8 million fine covers a $200,000 penalty, while $1.6 million will go toward compensating affected consumers and investor education.  Delaware will receive $200,000 under its agreement with the firm. Massachusetts Attorney General Maura Healey reported that about 200 of the state’s residents were impacted.

“Massachusetts families shouldn’t have their hard-earned savings put at risk by unsuitable investments,” Healey said in a statement. “Consumers must be able to place their trust in their financial advisors and feel confident that their money will be invested appropriately.”

In a statement released by the firm on Wednesday, LPL noted that the NASAA agreement represents the conclusion of “the most significant historical regulatory matters” that the b/d has been working through.

“As noted in its agreement with NASAA, LPL provided 'extensive cooperation' in NASAA’s review of this matter, and the agreement we reached neither admits nor denies wrongdoing,” the firm said. “Both [Massachusetts and Delaware] acknowledged LPL's cooperation in this matter and this agreement follows the national settlement the firm previously reached with FINRA relating to ETFs.”

In addition to the fine, LPL’s settlement with the NASAA’s Non-Traded REIT Task Force requires the firm to refund any customer losses stemming from the allegedly improper sales of non-traded REITS sold by the firm from January 2008 through December 2013, according to the North American Securities Administrators Association. LPL has hired an outside firm to review how many customers were affected, but NASAA reports it is believed to have affected more than 2,000 investors. LPL will contact investors and offer restitution after the records review is complete.

According to the results of an investigation led by the Nevada Secretary of State Securities Division, LPL failed in its supervisory role, as well as failed to enforce written policies on how advisors were to handle the sales of non-traded REITs.

Specifically, sales at LPL violated prospectus requirements for concentration limits imposed by states or the limits of the firm’s own alternative investment guidelines on the sale of non-traded REITs, according to NASAA.

In its agreement with the Massachusetts Attorney General and Delaware Department of Justice, LPL also agreed to make enhancements to its oversight of leveraged ETFs. The firm will implement a renewed training and monitoring program to “ensure the proper and effective use of leveraged ETFs as part of investors’ overall financial plans,” LPL said.

While the firm settled with most states over its sale of non-traded REITS in recent years, the firm still faces a separate action by New Hampshire securities regulators. In April, the state filed a complaint seeking $2.4 million from LPL in buybacks and restitution for clients who purchased non-traded REITs dating back to 2007.

Wednesday’s actions follow the Financial Industry Regulatory Authority’s move in May to sanction LPL over its policies regarding the sale of alternative products. FINRA ordered LPL to pay $10 million for failing to supervise sales of non-traditional ETFs, variable annuities, non-traded REITs and other complex products. The firm is also ordered to pay $1.7 million in restitution to certain customers who purchased non-traditional ETFs.

Last year, the company incurred $36.3 million in regulatory fines and restitution, four times the level of charges in the prior two years.

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