Regulator Issues Warning on Nontraded REITs

Warning tapeRead this website and you will see several warnings about the dangers of non-traded or thinly traded REITs. Although a popular way of investing in real estate, they can be difficult to sell or liquidate if an investor suddenly needs cash. There are other potential pitfalls as well. Don’t just take our word for it, however. The Financial Industry Regulatory Authority – FINRA – has also issued a stern warning to stockbrokers who sell these products.

A REIT is a Real Estate Investment Trust. They are securities that invest directly in real estate or in mortgages. Some can be bought and sold on major exchanges and are thus considered “liquid.” Others, however, must often be held for a long period of time. These non-traded REITs have no ready secondary market. Many older investors purchased these thinking they could always sell if they later needed cash. Unfortunately, they later learned that there was no ready market to sell their investment and that many REITs limit redemptions making it impossible to sell or cash in.
FINRA reviewed the marketing materials sent to potential customers and found significant deficiencies. Stockbrokers have done a poor job educating customers about the risks of these investments. In addition to failing to explain the inability to sell non-traded REITs, FINRA found that some promotional materials also failed to reveal that distributions received by investors were often nothing more than a return of principal.

Even worse, many broker dealers and investment advisers can’t even explain how REITs work nor can they recite the redemption rules for the products they are selling.

Two of the largest brokerage firms selling non-traded REITs are Ameriprise and LPL Financial. Earlier this year, LPL paid a $500,000 fine to settle administrative charges brought by Massachusetts over its REIT selling practices.

You may be able to bring a claim for REIT fraud if a stockbroker or investment adviser recommended an unsuitable REIT investment or failed to understand your investment needs and risk tolerance (“Know Your Customer” rules). These claims can usually be quickly resolved by arbitration before FINRA.

If you are stuck in a REIT that you can’t sell or were not told about the REIT’s redemption and dividend procedures, you might have a claim.

Post by Brian Mahany, author of the Due Diligence blog.

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