A broker-dealer settled charges brought by the Enforcement Section of the Massachusetts Securities Division of the Office of the Secretary of the Commonwealth for sales practice violations in connection with non-traded real estate investment trusts ("REITs").
According to the Consent Order, a broker-dealer representative made unsuitable sales to customers that resulted in the broker-dealer exceeding the liquid net worth concentration guidelines established by its own supervisory procedures. Between 2010 and 2015, the broker-dealer did not independently calculate the percentage of customers' liquid net worth in 48 non-traded REIT transactions made by the representative, which transactions exceeded the concentration guidelines applicable to the customers' accounts. Additionally, three of the customers were over the age of 80, resulting in the broker-dealer also violating its own written supervisory procedures prohibiting the sale of "alternative investment" products, such as non-traded REITs, to customers over the age of 80.
To settle the charges, the broker-dealer agreed to (i) pay a $150,000 fine, (ii) provide written offers of rescission/restitution for affected customers, (iii) cease and desist from further violations, (iv) a censure, and (v) enhance its policies and procedures.
Commentary
This case is another warning to firms that state regulators are likely to be examining their sales practices much more closely.
The topic of this enforcement action should not be a surprise either. At this point, firms should be alert to suitability questions on sales of illiquid, hard-to-value products to retail customers, particularly to elderly customers. In this case, the firm failed to follow its own supervisory procedures. In short, this was an enforcement action waiting to happen. Firms should accept the reality that this kind of loose compliance practice is simply not going to escape regulatory scrutiny.
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