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Non-Traded REITs on FINRA’s Radar

Non-traded real estate investment trusts (REITs) and the ways in which broker/dealers market and sell them to investors are facing increased scrutiny by the Financial Industry Regulatory Authority (FINRA).

FINRA has issued several Investor Alerts on non-traded REITs over the past two years, with examiners ramping up efforts to investigate the sales practices of sellers of the products. As reported Oct. 1 by Investment News, FINRA found shoddy due diligence at several firms in those investigations, as well as a failure of some to heed the red flags that existed prior to selling the products to investors.

Non-traded REITs were the focus of a speech made Sept. 27 by Susan F. Axelrod, FINRA’s Executive Vice President, Member Regulation Sales Practice, for the Securities Industry and Financial Markets Association’s Complex Products Forum. In her comments, Axelrod stated that investigations by FINRA examiners found many non-traded REIT investors to be confused about the features, fees and liquidity of non-traded REITs, as well as the distribution structure and the fact that there’s no guarantee distributions will continue in the same amount or at all.

Axelrod also noted that some firms failed to conduct adequate training for brokers who sell non-traded REITs. In other instances, Axelrod says FINRA examiners uncovered misrepresentations of the product’s features, including information on distributions and share values, in the advertising, sales literature and correspondence between brokers and investors.

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