Finra alerts broker-dealers to nontraded REIT info shortcomings

Regulator sees misleading communications around distributions, risks

May 3, 2013 @ 1:55 pm

By Bruce Kelly

The Financial Industry Regulatory Authority Inc. has alerted broker-dealers to a number of shortcomings in how they communicate with investors about nontraded real estate investment trusts.

According to a Finra notice issued yesterday, broker-dealers are falling short in a number of areas, including distributing materials that contain misleading and inaccurate statements about the potentials of investing in illiquid real estate programs.

“Recent reviews by Finra of communications with the public regarding real estate programs have revealed deficiencies,” Finra said.

One issue is how dividends — or “distributions” as they are known in the $10 billion-per-year industry — are paid to investors.

Nontraded REITs begin paying investors a distribution as soon as they are sold, with the distribution often initially coming from an investors' principal or borrowed money. Such distributions are one of the most attractive elements of the product.

Broker-dealer communications “have emphasized the distributions paid by a real estate program and failed to adequately explain that some of the distribution constitutes return of principal,” the Finra notice said.

The Finra notice to members is the latest in a string of various regulators' efforts to improve sales practices around and increase transparency of illiquid REITs, which are sold almost exclusively through independent broker-dealers such as LPL Financial LLC and Ameriprise Financial Services Inc.

For example, Finra last month indicated it would recommend to the Securities and Exchange Commission more-stringent rules about how nontraded REITs are valued, and in February, LPL Financial said it would pay a $500,000 administrative fine to Massachusetts over sales of REITs that did not meet state guidelines, as well as LPL's own rules and procedures.

For its part, the REIT industry has been working with regulators to shape an array of new guidelines and rules. The Investment Program Association, an industry trade group, said it supports the new Finra notice.

“Finra notices like this recent release are models for proper investor communication protocols,” Kevin Hogan, chief executive of the IPA, said in a statement.

According to Finra, some broker-dealers are downplaying the risks associated with such REITs. “In addition, some communications have not provided sufficient discussions of the risks associated with investing in the products in order to balance the presentation of benefits.”

Disclosure should be more accurate and explain how the REITs operate, Finra said. Descriptions of the REITs in communications to clients also should be consistent with the REIT's prospectus.

Finra's notice also drew attention to how broker-dealers discuss an annualized rate of distribution with clients. Firms must wait for the REIT to pay distributions for half a year before making claims about a REIT's annualized rate of return, according to the notice.

“In order to be fair and balanced, firm communications concerning a real estate program may not include an annualized distribution rate until the program has paid distributions that are, on an annualized basis, at a minimum equal to that rate for at least two consecutive full quarterly periods,” the Finra notice said.


What do you think?

View comments

Most watched


Finding innovation in your firm

Adam Holt of AssetMap explains how advisers understand they need to grow, but great innovation may be lurking right under your nose.


Finding your edge from Tony Robbins

Guru Tony Robbins has helped a lot of people, but armed with his psychology Financial Advisor Josh Nelson has helped his practice soar.

Latest news & opinion

The growth of factor-based investing

Advisers are making decisions about clients' portfolios by using the same characteristics that govern factor-based ETFs.

Finra makes its list to target hundreds of rogue individuals

The regulator sees patterns in the behavior and disclosures of high-risk brokers.

LTC insurer offering co-pays to blunt soaring premium increases

John Hancock policyholders would get a discount on their premium in return for agreeing to pay a bigger portion of their claims in the future.

Goldman Sachs acquires United Capital

After a payday of $75 million or more, CEO Joe Duran plans to join Goldman in a senior position.

Private equity loves IBDs, but will that last?

Three big acquisitions in less than a year signals renewed life in the formerly beleaguered industry.


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 It'll help us continue to serve you.

Yes, show me how to whitelist

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


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print