There is a new threat in the marketplace according to the SEC, Alternative Mutual Funds. While the name seems benign enough, the SEC warns that some of these new funds are bulking up on nontraded REITS – Real Estate Investment Trusts.
REITs are a great way for everyday investors to participate in large real estate projects. Some REITs invest in hotels while others develop shopping centers. Like many other investments, some are much riskier bets than others.
Nontraded REITs are a special type of REIT. Although publicly registered, they are non traded on an exchange. That means these investments are illiquid because there is no secondary market where the shares can be sold. In other words, investors must hold onto the investment for years. With many non-traded REITs, the hold time is 7 years or more!
These illiquid investments may be great for institutional investors and some high net worth investors that can afford to have their money tied up for years. They are generally not suitable for the average investor, the elderly and retirees. Unfortunately, some shady stockbrokers specifically target these folks with their sales campaigns.
Why? Because non traded REITs pay big commissions.
In the last couple years, the SEC, the states and industry regulators have begun clamping down on abusive REIT sales practices. Unfortunately, Wall Street has now introduced a new wrinkle to the mix, illiquid alternative mutual funds. Despite the generic sounding name, the SEC says some are loaded with nontraded REITs.
Like a child with a new toy, the Securities and Exchange Commission is worried that this new investment vehicle can be misused and marketed to the wrong clientele. In a recent address to a group of industry representatives, the SEC’s director of compliance inspections, Andrew Bowden, called these new REIT funds “a bright, shiny object with sharp edges.”
Bowden says, “The use of market valuation for illiquid securities in an open-ended mutual fund, which requires daily valuation and offers daily liquidity is fraught with risk. If any of you are considering launching a mutual fund that uses alternative investments or strategies, I implore you to evaluate the reasonableness and the effectiveness of your controls.”
Stockbrokers and investment advisors have a legal duty to understand your investing experience, risk tolerance and financial needs before making investment recommendations. Even then, they may only recommend suitable investments. Just as non-traded REITs continue to be marketed to the wrong people, we worry that these same brokers will improperly recommend the new alternative mutual funds to the same folks.
If you are a victim of REIT fraud or suffered a REIT loss caused by either the REIT itself or the broker recommending the REIT, you are not alone. Thousands of people suffer REIT losses each year. The good news is that both stockbrokers and the firms that employ them can be held responsible for unsuitable recommendations. That means it is possible to get your money back.
Most REIT fraud cases can be pursued through binding arbitration and on a contingent fee basis meaning no legal fees unless there is a recovery.
Post by: Brian Mahany, the author of Due Diligence.