May 3 The Financial Industry Regulatory
Authority (FINRA) is cautioning brokerage firms about the way
they market some real estate investment trusts after a review by
the Wall Street watchdog revealed problems, according to a
Some brokerages are giving investors information about
nontraded REITs, which invest in commercial real estate, that
include inaccurate or misleading statements about the potential
benefits of investing in such programs, FINRA said in a notice
posted on its website late Thursday.
The Wall Street self-regulatory organization said some
communications promote REIT distributions that are paid to the
investor as income but fail to adequately explain that those
distributions include some return of principal.
REITs invest in commercial real estate, such as hotels and
strip malls, allowing investors to profit from rising property
values. Nontraded REITs often have higher fees for investors
than publicly traded REITs.
Since nontraded REITs do not trade on securities exchanges,
they can be illiquid or difficult to sell in secondary markets.
Some communications that brokerages give to investors to
promote the securities do not adequately explain such risks to
balance the presentation of benefits, FINRA wrote in the notice.
FINRA has been honing in on improper sales of nontraded
REITs for at least several years. In October, the securities
regulator announced a settlement with a Syosset, New York-based
brokerage, David Lerner Associates, which agreed to pay about
$12 million to customers that bought into a $2 billion REIT.
The regulator's concerns also extend to unlisted direct
participation programs, or DPPs, a type of security that allows
investors to participate in the cash flow and tax advantages of
an underlying investment, include real estate.
FINRA's guidance does not mention the brokerages it reviewed
or how many.
It told the brokerage industry, however, that descriptions
of the real estate securities they offer must be consistent with
information included in the prospectuses for those securities.
Details about distribution rates must also be "fair and
balanced," FINRA wrote. For example, brokerages cannot describe
them as a "yield," which may improperly suggest the investment
is a bond. They also must explain, among other things, that
distribution payments are not guaranteed.
In addition, brokerages may not "cherry pick" historical
performance information about REITs affiliated with current
products they are pitching. Brokerage should include, with
"equal prominence," all information about affiliated or related
REITs, FINRA said.