Non-Traded REIT Problems Result in Warning Over Misleading Investors

An independent authority charged with overseeing brokerage firms nationwide has issued another warning about problems with non-traded real estate investment trusts (REITs), indicating that misleading information is often provided for investors about the benefits and risks.    

The Financial Industry Regulatory Authority (FINRA) warned brokerages last week to be careful in how they communicate the operation of REITs, after seeing information provided that could mislead investors.

In a regulatory notice (PDF) issued this month, FINRA states that it has seen communications to the public that contained inaccurate statements on the potential benefits and which did not provide sufficient information on the REIT risks.

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The authority reminded brokerages of FINRA Rule 2210, which “requires that a broker-dealer’s communications be fair, balanced and not misleading.” The rule requires communications that discuss the benefits of an investment to include the risks as well, and the presentation of the benefits and risks must be balanced, meaning the firm cannot downplay the risks through presentation.

“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,” the warning explained.

Investors Warned About Non-Traded REITs in 2011

The warning comes about a year and a half after FINRA issued a similar notice to warn investors to beware when investing in REITs.

In October 2011, FINRA warned investors about REIT risks, which may not immediately be apparent and may not be fully explained by some investment firms.

REITs take the money from a wide pool of investors and use that capital to buy a variety of real estate. They are known for being well distributed and having a good chance at capital appreciation, but they are often heavily subsidized by loans, have high sale fees and are hard to redeem early. Some REITs are publicly traded on a national securities exchange, but the FINRA warning specifically addressed the risk of non-traded REITs.

In May 2011, FINRA filed charges against David Lerner Associates, accusing the company of targeting elderly and unsophisticated investors in order to sell them Apple REITs to cash in on lucrative commissions.

FINRA claimed that the shares were sold with little or no consideration for the welfare of the investors.

The charges resulted in a number of FINRA investor arbitration lawsuits  and Apple REIT class action lawsuits by former David Lerner Associates clients who were sold Apple REIT Ten shares. The claims alleged that unsophisticated clients of limited financial means were repeatedly told the Apple non-traded REITs were “safe and secure” and “would not lose money.”

FINRA is a non-governmental regulatory body that handles the resolution of disputes between investors and stockbrokers and other financial firms. It was created in July 2007 as a successor to the National Association of Securities Dealers, to arbitrate stock broker fraud claims that can include charges of breach of contract, breach of fiduciary duty, negligence, misrepresentation, unauthorized trading and other claims that investments were improperly handled.

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