A recent lawsuit by the state of New Hampshire against LPL Financial, one of the nation’s largest networks of broker-dealers, should be setting off alarm bells among investors who were recommended non-traded REITs and other alternative investments by their brokers.
LPL Lawsuit Suggests Systemic Issue with Alternative Investments
While the lawsuit originally got started on behalf of a single elderly investor, New Hampshire’s investigation of LPL identified what appears to be a systemic problem in how LPL brokers recommend alternative investments to customers. According to the allegations, LPL and its brokers inappropriately recommended non-traded REITs (Real Estate Investment Trusts) and other alternative investments to customers in violation of New Hampshire law and of the broker-dealer’s own internal policies and procedures. New Hampshire is suing LPL for $3.6 million in restitution, fines, and repayment of investigation costs. In 2014 alone, LPL paid more than $36.3 million in regulatory charges, including fines and restitution to injured investors.
Brokers Must Meet State and Federal Investment Suitability Standards
New Hampshire isn’t alone among states that have laws designed to protect investors against the inappropriate recommendation of alternative investments and against unsuitable investments in general. Indeed, broker-dealers across the country are not only bound by state law but by federal law as well, including SEC and FINRA regulations, which enforce the fiduciary duty brokers owe their customers. Whether we’re talking about non-traded REITs, private placements, equipment leasing programs, or even stocks and bonds, registered financial advisors are required to carefully match their customers with suitable investments on the level of individual financial products, and suitable portfolios of investments on the level of the customer’s overall assets. This matching consists of a detailed analysis of, on one hand, the customer’s investor profile, including his or her age, income, assets, objectives, risk tolerance, and more; and on the other hand, of the legitimacy and nature of the financial product itself that is being recommended. If a broker fails at either of these tasks, or makes a bad match between the two, he or she may be liable for misconduct and negligence.