Why nontraded REITs are in Finra's cross hairs

Finra's Susan Axelrod cites lack of 'reasonable diligence' by sellers of nontraded REITs

Oct 1, 2012 @ 3:17 pm

By Bruce Kelly

Nontraded real estate investment trusts and potential shortcomings in how broker-dealers sell them are clearly in the cross hairs of examiners with the Financial Industry Regulatory Authority Inc.

Over the past two years, Finra examiners have scrutinized “numerous retail sellers of nontraded REITs,” according to comments made last Thursday by Susan Axelrod, executive vice president of member regulation sales practices at Finra. “In several instances, Finra examiners have found that firms selling these products failed to conduct reasonable diligence before selling a product and failed to make a determination that the product was suitable for investors.”

“Finra examiners have noted that in the instances of REITs that have experience financial difficulties, red flags existed and should have been considered by firms prior to the product being offered to firm clients,” according to Ms. Axelrod's prepared comments to the Securities Industry and Financial Markets Association's Complex Products Forum, which was held in New York.

Independent broker-dealers' falling short in due diligence when selling complex, illiquid products has been a focus of Finra exams and fines since the market collapse of 2008. Finra recently has fined and sanctioned a handful of broker-dealers that sold two series of private placements that imploded in 2009 — Medical Capital Holdings Inc. notes and preferred shares of Provident Royalties LLC — often citing lax and shoddy due diligence on the products.

Ms. Axelrod also said that distributions, or dividends, of nontraded REITs are on Finra's radar.

“Nontraded REITs may also borrow funds to make distributions if operating cash flow is insufficient,” she said. “And excessive borrowing may increase the risk of default or devaluation. In addition, nontraded-REIT distributions may actually be a return of principal,” she said.

Financial advisers, therefore, “must use caution when discussing distributions with investors, particularly when making comparisons to other dividend-paying investments,” she said.

Some broker-dealers, meanwhile, also have failed to conduct adequate training for the advisers who sell the products, she said.

“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,” she said. “All of these issues raise investor protection concerns.”

0
Comments

What do you think?

View comments

Recommended for you

Featured video

Events

Behind the scenes at Pershing Insite 2018

What goes on behind the scenes at one of the industry's biggest conferences? Join us for an all-access sneak peak!

Latest news & opinion

Merrill Lynch fined $42 million for misleading customers

In addition to the practice of 'masking' trades, the wirehouse went to extremes to cover up the wrongdoing.

Advisers with billions in AUM leaving Wall Street

Merrill Lynch has seen two teams exit recently, each with more than $4 billion in client assets.

Wells Fargo weighs changes to wealth unit

The move would reflect the bank's effort to cut $4 billion in costs.

Small broker-dealers seek legislative relief from annual audits

Bills introduced in House, Senate would remove PCAOB requirement.

Meet our new 40 Under 40s

For a fifth year, InvestmentNews is proud to shine a spotlight on the amazing accomplishments and potential of top young financial professionals.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print