FINRA Looking at Broker Dealers Who Sold High Commission Private REITs

Representing Investors Nationwide

A May 28, 2010 article by Bruce Kelly in Investor News, discusses how the Financial Industry Regulatory Authority (FINRA)is focusing on these non-traded commercial real estate investment trusts and the manner in which they were sold to brokerage firm clients.

Like many somewhat esoteric products (see structured notes and credit default swaps) born out of an overpriced and over speculated real estate market, real estate investment trusts were sold like conventional products to rank and file brokerage clients. However, unlike a typical stock, bond or mutual fund, these investments were not readily traded and therefore illiquid. When the market went south in 2008, the value of the real estate holdings in the trusts went with it, dividends were cut and redemptions halted, leaving many an unsuspecting investor in financial ruin.

Independent broker-dealers appear to be the biggest purveyors of these investments. Subsequently, many have significant exposure to these illiquid investments and are now under siege by investors who want their money back. Arbitration claims related to REIT’s has risen dramatically while collectablity is a major concern. Many independents (see Gun Allen and Private Asset Group) have withdrawn FINRA registration as a result of net capitalization requirements.

The regulatory problem is complicated by the fact much of these investments were sold by Registered Investment Advisers who are not registered with FINRA but with the Securities & Exchange Commission (SEC) and there respective states. FINRA would like to see oversight (and jurisdiction)brought under one roof and require advisers to register with FINRA like brokers and broker dealer must do. The say that will make it easier to prevent abuse in the sale of unconventional investments going forward.

If you lost money in a Real Estate Investment Trust (REIT) or Tenant In Common (TIC) investment(s), please contact our office for a free case evaluation. Thank you.