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LPL growth causes legal and compliance headaches

In February, the country’s largest independent broker-dealer, with more than 13,000 contractor representatives and advisers, was ordered by Massachusetts to pay up to $2 million in restitution to clients and a fine of $500,000.

Ameriprise Financial Inc. and LPL Financial are the two largest sellers of nontraded REITs, accounting for about 20% of the annual $10 billion in sales of such investments.

A problem for LPL is that sales of alternative investments represent a growing stream of revenue. Commission revenue for alternative investments jumped 25% to $143 million last year, from $114 million in 2011.

As demand increases, regulators are watching how financial advisers sell the products more closely than ever.

As a consequence of Massachusetts’ investigation into its sale of nontraded REITs, LPL already has made some changes to the oversight of its alternative products, including nontraded REITs.

“In July of 2012, LPL changed its policies and procedures, creating a separate complex-products team to review all alternative investments,” according to the Massachusetts lawsuit.

In a move that shows how wary the firm has become of complex products, LPL this year also put restrictions on its advisers’ sales of leveraged, inverse and monthly- reset mutual funds.

LPL’s recent rash of compliance problems stem from inadequate oversight of its far-flung group of reps and advisers, according to the Times story.

State regulators, who operate as local cops on the beat, have long faulted the independent-broker-dealer industry for a shortcoming in overseeing its reps.