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