Wells Investment Securities Inc., the broker-dealer distributor for the giant nontraded-REIT sponsor Wells Real Estate Funds Inc., has been fined $300,000 by Finra for using misleading marketing material in one of its recent offerings.
The Wells broker-dealer's problems were related to the allegedly misleading marketing materials for its Wells Timberland REIT Inc., according to the Financial Industry Regulatory Authority Inc.
In reaching the settlement, Wells Investment Securities neither admitted nor denied the charges. A Wells Timberland REIT filing with the SEC in March revealed the potential Finra fine.
The broker-dealer reviewed, approved and distributed the marketing material for the Wells Timberland REIT, according to Finra. From May 2007 through September 2009, the B-D approved 116 advertising and sales materials containing "misleading, unwarranted or exaggerated statements,” Finra said in a press release.
At the end of last year, the Wells Timberland REIT had $360 million in assets.
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Nontraded real estate investment trusts have come under scrutiny of late. In October, Finra issued an alert to investors that outlined the products' features and potential drawbacks, such as high fees and a lack of liquidity.
In the case of Wells Timberland, Finra questioned, among other things, the REIT's tax status.
“Wells Timberland's initial-offering prospectus stated that it intended to qualify as a REIT for the tax year that ended Dec. 31, 2006; however, it did not qualify for REIT election until the tax year that ended” three years later, Finra said.
In addition, the firm's communications contained misleading statements about the REIT's portfolio diversification, and ability to make distributions and redemptions, according to Finra.
“By approving and distributing marketing materials with ambiguous and equivocal statements, Wells misled investors into thinking Wells Timberland was a REIT at a time when it was not a REIT,” Finra executive vice president and chief of enforcement Brad Bennett said in a statement.
Finra also found that Wells failed to have supervisory procedures in place to make sure that sensitive customer and proprietary information stored on laptops were being adequately safeguarded.
"These proceedings were not related to any misuse of investor funds, nor were they a result of complaints received from Wells investors," Kirk Montgomery, Wells' chief legal and compliance officer, wrote in a statement to
InvestmentNews. "As stated in the letter of acceptance, waiver and consent, the advertising materials in question had been properly filed with the Securities and Exchange Commission and state securities regulators. In addition, certain of the materials were filed with Finra."
Wells Real Estate Funds is one of the largest sponsors of investments in the nontraded-REIT industry, with $11 billion in assets and 250,000 investors. Leo Wells, its founder and chairman, is well-known in the independent-broker-dealer industry.
Wells has had problems with regulators in the past. In October 2003, Finra's precursor, NASD, sanctioned Wells Investment Securities for improperly rewarding broker-dealer reps who sold the company's REITs. Those rewards included lavish entertainment and travel perquisites. At the time, the regulator also censured Mr. Wells and suspended him from acting in a principal capacity for one year.
