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FINRA Says Private Placements and Non-Traded Real Estate Investment Trusts Are Top Focus

David P. Meyer, Esq.

James Shorris, FINRA’s executive vice president and executive director of enforcement, recently announced that monitoring Regulation D private placements and non-traded real estate investment trusts is a “major, major initiative” for FINRA’s enforcement department (“Private deals at top of Finra's hit list,” InvestmentNews, Feb. 2, 2011). The investments are currently the top two areas of focus for the department.

According to the article, FINRA is primarily concerned with the lack of due diligence some broker-dealers have shown when recommending private placement products, such as those offered by Medical Capital Holdings Inc. and Provident Royalties LLC, as suitable for their clients.

Both Provident Royalties LLC and Medical Capital Holdings, Inc. were sued by the SEC in 2009. Provident Royalties was charged with the operation of a $485 million offering fraud and Ponzi scheme, and Medical Capital was charged with the operation of a $77 million offering fraud. Since mid-2009, lawsuits and concerns over lack of due diligence have caused at least a dozen independent broker-dealers to file for bankruptcy or to run into major problems with FINRA. The organization’s enforcement department is now committed to closely monitoring the remaining firms that sell such products.

Non-traded real estate investment trusts typically require that investors hold the securities for a fixed period of time, in some cases up to 10 years or longer. FINRA’s concern is that many sales representatives may not have explained the illiquidity of the investments to potential investors prior to purchase. FINRA’s enforcement department will be investigating whether the products were sold properly to customers.