FINRA Continues to Scrutinize Nontraded REITs

Over the past couple of years, examiners with the Financial Industry Regulatory Authority, Inc. (“FINRA”) have focused on how broker-dealers sell nontraded real estate investment trusts (“REITs”). Specifically, Susan Axelrod who is the Executive Vice President of Member Regulation Sales Practices at FINRA noted in a September 2012 speech that examiners “have found that firms selling these products failed to conduct reasonable due diligence before selling a product and failed to make a determination that the product was suitable for investors.”

Ms. Axelrod’s comments focused on the observations that FINRA examiners have found that investors are often confused about the features, fees and liquidity of these REITs. Particularly she states the REITs were often sold as an alternative to bonds with the expectation that distributions would be derived from income instead of debt, that the distributions would be continuous and that the investment would remain stable.

Axelrod continued by stating that Brokers owe a duty to investors to make suitable recommendations and to accurately and fully explain the risks associated with a proposed investment. This includes broker-dealers ensuring that advisers who sell the products have been adequately trained.  Ms. Axelrod goes on in her speech to say that “FINRA examiners are also reviewing advertising, sales literature, and correspondence between brokers and investors and, in some instances, have found misrepresentations of product features, such as distributions and share values. All of these issues raise investor protection concerns.”

To ensure you are abiding by all of your requirements under FINRA, the SEC, or any other Self Regulatory Organization or if you are a broker-dealer seeking additional guidance on this, suitability requirements and other regulatory questions, please contact us at (619) 278-0020 to schedule a consultation.

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