SII, a broker-dealer recently acquired by LPL Financial, has been censured, fined $50,000 and ordered to pay restitution to customers who were sold $4.6 million in illiquid, non-traded real estate investment trusts in violation of regulation by the Financial Industry Regulatory Authority, Massachusetts law and the firm’s own customer net worth policies.

The fine and restitution are part of a settlement SII entered into with the Massachusetts Securities Division in connection with the company’s failure to supervise the sales of non-traded REITs. SII is an independent broker-dealer with National Planning Holdings, which was acquired by LPL in August 2017. Under the terms of the transaction, LPL assumed the historic liabilities of the four NPH broker-dealers.

“SII allowed its agents to miscalculate customers’ liquid net worth in order to sell them high-commission non-traded REITs in violation of Massachusetts guidelines and its own policies,” said William F. Galvin, Massachusetts’s secretary of the commonwealth. Non-traded REITs traditionally pay commissions and fees ranging from 15 to 18 percent.

SII’s suitability and disclosure forms for non-traded REITs state that no more than 10% of an investor’s liquid net worth may be invested in any particular non-traded REIT and no more than 20% of a client’s liquid net worth can be concentrated in non-traded REITs.

While SII’s own internal policies made clear that annuities are illiquid products, SII nevertheless included annuities with substantial pending surrender fees as liquid in order to inflate customers’ net worth so they qualified for non-traded REIT sales. Finra has also said that annuities with surrender fees are long-term, illiquid investments.

The Massachusetts Securities Division became aware of the violations when a 63-year-old nurse complained about the suitability of the products she was sold by SII in 2016. The nurse said she told SII agents she and her adult daughter had significant health issues and she anticipated needing immediate access to her funds. SII sold her three annuities with high surrender fees and lockup periods of five to 10 years, accounting for 72% of her net worth. She was then sold a non-traded REIT, which “far exceeded 10 percent of her liquid net worth,” the Massachusetts charges against SII stated.

When the nurse became unemployed and suffered from medical issues she had disclosed to SII agents, she was unable to access most of her funds without paying significant penalties.

The Massachusetts Securities Division’s Enforcement Section identified other investors in similar situations.

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