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SII Charged With Unethical Conduct

By Alex Padalka September 21, 2017

Massachusetts’ top securities cop has charged SII Investments with unethical conduct related to the sale of real estate investment trusts, according to an administrative complaint filed by the state. SII's assets was recently bought by LPL Financial.

The broker-dealer allegedly let its agents artificially inflate its clients’ net worth figures, thus violating the firm’s own guidelines prohibiting a single non-traded REIT to account for more than 10% of a client’s net worth, or more than 20% in non-traded REITs in general, according to the complaint from the office of the Secretary of the Commonwealth of Massachusetts, William Galvin. The practice allegedly resulted in almost $4.7 million in non-traded REITs sales and more than $300,000 in commissions, the complaint says.

Non-traded REITs, because they’re highly illiquid, are especially risky compared to listed REITs, according to the complaint. The high fees and commissions — as well as limited redemption opportunities — also expose non-traded REITs sellers to potential conflicts of interest, Galvin says in the complaint. SII’s internal compliance procedures recognized such risks and therefore put the 10% cap on how much of the asset can be held in a client portfolio. But the cap wasn’t actually put into practice, according to the complaint.

In addition, SII’s guidelines prohibit its reps from including in the calculation of a client's net worth, products that come with a “substantial penalty.” But the policies fail to provide a definition of what such a penalty would look like, Galvin said in his complaint. And in calculating net worth, SII included such products as annuities, which carry surrender charges, according to the complaint.

SII agents and sales supervisors, when giving testimony to the security watchdog’s enforcement unit, apparently couldn’t define the “substantial penalty” either, nor point to any time it was applied in a calculation.


LPL Financial signed an asset purchase agreement covering SII last month from Jackson National Life Insurance Company as part of a $325 million purchase of the holding company National Planning Holdings. In addition to SII, NPH includes independent broker-dealers INVEST Financial Corporation, Investment Centers of America, Inc. and National Planning Corporation.

"Under the construct of our agreement, LPL would not be liable for this matter," Jeff Mochal, senior vice president of public relations at LPL said in a statement emailed to FA-IQ.

Editor's note: This article was modified to make mention that in last month's purchase of SII, LPL engaged in an asset purchase agreement with Jackson National Life Insurance Company, rather than a purchase of the entire firm.