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Recovering Losses Caused By Investment Misconduct

Broker Dealers Fail on REITs

BDs Failing to Communicate REIT Pitfalls to Investors, Says FINRA as it Cracks Down

The Financial Industry Regulatory Authority came down on broker-dealers early this month for failing to communicate appropriately about non-traded real estate investment trusts (REITs).

FINRA rules require broker-dealers to communicate “fairly” about investments, especially complicated investments like REITs.

“Fair” means spending as much discussion time on risks as on benefits and not making any misleading statements. However, recent reviews show the firms aren’t always meeting guidelines, particularly when it comes to discussing the pitfalls of REIT investments.

“Recent reviews by FINRA of communications with the public regarding real estate programs have revealed deficiencies,” the regulator told member firms in a recent regulatory notice.

Such deficiencies include:

• making inaccurate or misleading statements about the potential benefits of investing in an REIT,
• overemphasizing the distributions paid by the REIT program without adequately explaining that some of the funds were actually a return of principal,
• inadequately presenting the risks associated with REITs.

“Firm communications concerning real estate programs must balance any presentation of the potential benefits of such investments with disclosure concerning potential risks,” wrote FINRA in the notice. “This balance will be achieved if risk disclosure is presented in a clear and prominent manner, commensurate with the discussion of benefits, and is not relegated to a footnote.”

Several investment firms have come under regulatory fire in recent years for these REIT and other investment communication deficiencies.

In 2012, for example, the state of Massachusetts charged LPL Financial with engaging in dishonest and unethical business practices and failing to supervise its registered representatives in the sale of seven non-traded REITs to nearly 600 clients.

In 2011, FINRA charged David Lerner Associates with using misleading marketing materials in the sale of Apple REIT Ten. Both firms also were named in numerous investor claims.

In the notice, FINRA issued guidelines for firms to follow to ensure compliance with communication rules. However, investors who wish to protect themselves from being roped in by misleading statements can learnhow REITs really work here.

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