The damage from Massachusetts’ latest action against sales of non-traded REITS by independent broker-dealers may not be fatal, but it should cause firms to reconsider their sales strategies, say industry observers.

Five IBD firms agreed to pay nearly $10 million in restitution and fines in a settlement announced Wednesday by William F. Galvin, Secretary of the Commonwealth of Massachusetts.

"Everything about this latest settlement says ‘Warning! Warning!’"  says industry consultant Tim Welsh, president of Larkspur, Calif.-based Nexus Strategy. “Alternative assets like non-traded REITs are very attractive to the IBD channel because they offer higher payouts, and clients are looking for yield in a low-interest rate environment. IBDs are under a lot of pressure and are prone to fall into these product traps. But ... IBDs are going to have to react to this higher level of scrutiny.”

Other experts agreed. “It is a strong signal to investment professionals,” says Will Bressman, CEO of RIA in Box, which provides compliance and registration services to advisors. The Massachusetts settlement "may not cause long-term damage, but it does demonstrate the need for any investment professional to exercise extreme caution with regard to high-risk products,” he adds.

In the statement announcing the deal, Galvin blasted a "pattern of impropriety" with regard to non-traded REIT sales.

“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,” he said.


As part of the settlement, Ameriprise Financial Services agreed to pay $2,592,890 in restitution to investors and a $400,000 fine; Commonwealth Financial Network will pay $2,074,710 in restitution and a $300,000 fine; and Royal Alliance Associates, Securities America and Lincoln Financial Advisors agreed to pay lesser amounts, according to the Massachusetts announcement. The total sum for the five firms reached $8.6 million in restitution to investors and $975,000 in fines.

An Ameriprise spokesman said the company was "pleased to resolve this matter, which affected only a small number of transactions during the 2006-2008 time period. During this entire period, Ameriprise’s compliance manuals and training materials included specific provisions about state-specific suitability requirements like those in Massachusetts. And as noted in the settlement, going back to 2010, Ameriprise has stood out in the industry by having already implemented a centralized system to review these transactions."

Commonwealth Financial also confirmed the settlement in a statement. "Commonwealth Financial Network has entered into a consent order with the Commonwealth of Massachusetts related to 42 transactions over a six-year period involving non-traded REITs,” Paul Tolley, Commonwealth’s senior vice president and chief compliance officer said. “This order has settled the associated claims, and we continue to take seriously our responsibility to protect investors’ interests. As always, Commonwealth maintains a strong culture of compliance and continually reviews and updates its policies and procedures to ensure alignment with state, federal, and other regulations designed to protect investors.”

The latest action follows a settlement Galvin reached earlier in the year with LPL Financial to pay at least $2 million in restitution and $500,000 in fines over the sale of non-traded REITs.

Read More:

Register or login for access to this item and much more

All Financial Planning content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access