Five brokerage firms that improperly sold non-traded real estate investment trusts (REITs) will make restitution to investors of about $8.6 million, and pay fines totaling $975,000, after settling with Secretary of the Commonwealth William Galvin.
An investigation revealed "significant and widespread problems" with the firms’ compliance with their own policies, practices and procedures rules, as well as adherence with Massachusetts prospectus requirements, according to information from Galvin’s office. Those activities left investors trapped in "illiquid and underperforming financial products," according to the secretary’s office.
"Our investigation into the sales of REITs, triggered by investor complaints, showed a pattern of impropriety in the sales of these popular but risky investments on the part of independent brokerage firms where supervision has historically been difficult to maintain," Secretary Galvin said in a statement.
The firms that settled are: Ameriprise Financial Services Inc., which will pay $2.59 million in restitution and pay a $400,000 fine; Commonwealth Financial Network, which will fork over $2.07 million in restitution and pay a $300,000 fine; Royal Alliance Associates, which will make $59,000 in restitution and pay a $25,000 fine; Securities America, which will pay $778,400 in restitution and a $150,000 fine; and Lincoln Financial Advisors Corp., which will make $503,940 in restitution and pay a $100,000 fine.
In addition, the firm LPL Financial has completed the second round of its restitution in connection for similar violations settled with the division in December. The additional amount of $2.59 million from LPL brings the total restitution in Massachusetts from improper REIT sales to more than $11 million, and fines of more than $1.4 million.
"The independent firms must spend as much manpower and resources on compliance and supervision as they do on growth and revenue if regulators are to consider this model a truly viable option for investors," Galvin added in the statement. "The willingness of the five settling firms to correct this problem today is a small step in the right direction."
REITS own and manage income-producing property or are involved in real estate financing. While currently a popular investment, REITs present risks to investors that have led Massachusetts to impose the rule limiting an investor’s purchase to no more than 10 percent of the investor’s liquid net worth, according to the statement.
