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

REITS, real estate, finra
+ Zoom
(Blomberg News)

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

Perspectives from a NextGen adviser

Male advisers still outnumber female advisers 4 to 1. Allei Holway of AXA talks about why becoming an adviser appealed to her and why more millennials are a good fit for this industry.

Latest news & opinion

Jay Clayton says SEC, DOL can give market 'clarity' on fiduciary rule

Chief regulator is confident two agencies could reach 'common ground' on an investment advice standard across all accounts.

Vanguard winning at bond inflows, too

But iShares is strong competition.

Sen. Gary Peters brings broker background to work every day on Capitol Hill

Michigan Democrat resists ripping up DOL fiduciary rule but would be open to some changes.

DOL fiduciary rule causing DC-plan record keepers to change business with insurance agents

Principal has communicated that independent agents must change their business models to keep receiving compensation.

DOL fiduciary rule opponents want to push implementation back until 2019

ICI, Chamber of Commerce among groups asking for delay, while Democratic lawmakers call on DOL to keep to its earlier planned schedule of Jan. 1, 2018.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print