FINRA vs. VFG Securities – The Battle over Nontraded REITs

We have long warned about the problems with nontraded REITs. Unlike traditional REITs, the non-traded variety are illiquid. That means if you have to sell one quickly to raise capital you may find yourself with no ready buyers.

The lack of liquidity isn’t the only problem with nontraded REITs. Regulators don’t like them because they carry higher than average fees and are hard to value. That means your statement may say your 100 REIT shares are worth $10 per share but what are they really worth if you can’t sell them?

In the last several years many states and the Financial Industry Regulatory Authority – FINRA – have began working on rules to make share values and fees easier to understand and to insure that nontraded REITs are only marketed to qualified investors. Some states have even enacted concentration limits meaning a broker can only recommend that an investor have a limited percentage of his or her investment monies in these products.

With that backdrop, last week FINRA filed a complaint against VFG Securities. Although a tiny brokerage firm, FINRA says that VFG generated 95% of its revenues from nontraded REITs and other illiquid securities. VFG denies the charges and claims it is being persecuted by the regulatory agency.

FINRA says that the owner of VFG used a book he wrote as sales literature touting nontraded REITs. For those not familiar with REITs, the acronym is short for Real Estate Investment Trust. REITs allow ordinary investors to pool their money and participate in large real estate projects like hotels, warehouses and office buildings. A tax code provision from the 1960’s makes them even more attractive for investors.

We have nothing against most REIT investments. The nontraded variety, however, must often be held for a decade or longer and can’t be easily liquidated. For that reason, they are not suitable for investors needing access to their money and retirees. They also carry high fees.

Although the owner of VFG is vehement in his denials, comments posted on the industry news site InvestmentNews seem to support FINRA and not VFG. One investment professional had this to say about nontraded REITs, “They pay very high commissions which is the reason for the abuse. If FINRA was serious about stopping abuse in this area, it could bring many more enforcement actions. This the tip of a very large iceberg.”

We agree with those comments. Brokers frequently place investors in these investments without explaining the risks and the unusually high commissions.

For its part, VFG has a relatively clean record. The current complaint was filed on February 9th and is obviously in its infancy. A prior similar complaint has been pending since April of 2015. There have been no reported lawsuits or arbitration awards against the company.

We don’t know yet if VFG Securities is violating any FINRA rules or laws. We do know, however, that many investors find themselves heavily invested in nontraded REITs even though the investments are unsuitable and illiquid.

If you were misled by a stock broker or financial professional about nontraded REITs or other investments, you may have a claim. Stockbrokers are legally required to fully understand their customer’s needs and only make suitable recommendations. Brokerage firms are required to properly supervise their employees and agents.

Think you have a claim? Call us at 877-410-8172. Cases are handled on a contingent fee or “success” fee basis meaning there are no legal fees or costs unless we recovery money for you.

 

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