TAG | risky REITs
Comments off · Posted by Securities Lawyer in FINRA
William Galvin, the secretary of the Commonwealth of Massachusetts, today announced settlements with five leading independent broker/dealers to make $8.6 million in restitution to investors and pay fines totaling $975,000 for the sales of nontraded real estate investment trusts (REITs).
These five firms are: Ameriprise Financial Services Inc., with $2.6 million in restitution and a fine of $400,000; Commonwealth Financial Network, which will pay $2.1 million in restitution and a $300,000 fine; Royal Alliance Associates Inc., which will pay $59,000 in restitution and a $25,000; Securities America Inc., paying $778,000 in restitution and a $150,000 fine; and Lincoln Financial Advisors Corp., paying $504,000 in restitution and a $100,000 fine.
“Our investigation into the sales of REITs, triggered by investor complaints, showed a pattern of impropriety on the sales of these popular but risky investments on the part of independent brokerage firms where supervision has historically been difficult to monitor,” Mr. Galvin said in a statement.
This is the Massachusetts Securities Division’s second settlement this year over the sale of nontraded REITs. In February, Mr. Galvin reached a settlement with LPL Financial LLC to pay at least $2 million in restitution and $500,000 in fines over the sale of nontraded REITs.
Mr. Galvin has garnered more than $11 million total this year, in restitution for Massachusetts investors and levied $1.4 million in fines from independent broker-dealers, many that sell nontraded REITS.
Soreide Law Group, PLLC, represents clients nationwide before FINRA. Call for a free consultation on how to potentially recover your losses. To speak with an attorney call 888-760-6552.
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Comments off · Posted by Securities Lawyer in FINRA
In an article for InvestmentNews.com, on February 1st, 2012, Mark Schoeff Jr. writes that in a market defined by low interest rates, investors are searching for higher returns. But brokers better be careful how they try to deliver those results, according to their primary regulator.
In a 16 page letter posted on its website, the Financial Industry Regulatory Authority Inc., (FINRA) outlined its regulatory and examination priorities for 2012. At the top of the list: conduct and products meant to beat the market that instead are unsuitable for investors.
“FINRA is informing its examination priorities against the economic environment that investors have faced since 2008, as these circumstances have steadily contributed to conditions that foster an increased risk of aggressive yield chasing, inappropriate sales practices, unsuitable product offerings, and misappropriation and fraud,” the letter states.
“Given the low yields on Treasuries, we are concerned that investors may be inadvertently taking risks that they do not understand or that are inadequately disclosed as they chase yields,” the letter continues. Lack of liquidity and inadequate cash flow in investments also are red flags Finra is monitoring.
Shoeff writes that among the products that are on FINRA’s watch list for suitability problems: residential- and commercial-mortgage-backed securities, nontraded real estate investment trusts, municipal securities, exchange-traded funds using synthetic derivatives and significant leverage, variable annuities, structured products, private placements and life settlements.
FINRA said that it is undertaking a “broader data collection effort” and targeting its enforcement efforts on high-risk firms. FINRA warned brokers not to enhance their balance sheets by taking on excessive debt or manipulating their assets and liabilities.
“FINRA is concerned about the additional risks that are being taken as a result of increased leverage, including market, credit and liquidity risk,” the letter states. “We will continue to monitor firms that employ a high degree of leverage, both on-balance-sheet and off-balance-sheet during the upcoming year.”
The InvestmentNews.com article goes on to say that FINRA also is zeroing in on fees.
“We remain concerned about firms’ charging retail investors hidden, mislabeled or excessive fees,” the letter states. “In 2011, FINRA brought cases against several broker-dealers that charged such excessive fees in the form of postage and handling charges that were unrelated to actual costs, and we will continue to investigate firms that appear to be taking advantage of investors through fee schemes.”
FINRA’s guidance on social media is less explicit. It said that it “is a topic on which we continue to receive many questions from firms.” FINRA reiterated that “core regulatory requirements apply to all communications with the public, irrespective of the medium or device used to communicate. Firms must be able to appropriately supervise business communications made using personal devices.”
Schoeff writes that high-frequency trading, and oversight of the creation and redemption of exchange-traded funds, also are listed among the agency’s many priorities. FINRA oversees about 4,460 broker-dealers and enforces the suitability standard, which requires brokers to sell products that fit their clients’ investment needs, timelines and risk appetites.
Other regulators are paying attention to FINRA’s priorities as well.
“States look at these very highly,” said Steve Thomas, director of Lexington Compliance, a division of RIA in a Box LLC, and former South Dakota chief compliance examiner. “They make individual decisions on whether these items should be added to their state’s examinations.”
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Comments off · Posted by Securities Lawyer in FINRA
On October 4, 2011, the Financial Industry Regulatory Authority Inc. or FINRA, issued an alert to investors that outlines the nontraded real estate investment trusts (REITs) features and potential drawbacks, such as high fees and a lack of liquidity. As the name suggests, nontraded REITs aren’t listed on a national exchange writes Bruce Kelly for InvestmentNews.com.
“Turbulence in the stock market and an extended period of low interest rates have contributed to investors’ seeking products offering attractive yields,” Finra’s alert said. “One such product is the publicly registered non-exchange-traded real estate investment trust, or ‘nontraded REIT,’ for short.”
This was the first Finra investor alert regarding REITs and is yet another indication of the regulator’s intense interest in the product according to FINRA’s website.
Kelly goes on to say that such REITs are sold exclusively through independent broker-dealers, though executives with nontraded REIT sponsors said in private discussions that they intend to negotiate with the wirehouses also to sell the products.
Last month, Finra issued a rule proposal that would drastically change how the value of nontraded REITs appeared on client account statements, a troubling issue for independent broker-dealers that sell the products and the sponsors that create them. Finra’s new proposal takes aim at brokers’ commissions and other upfront costs.
In May, the regulator filed a complaint against David Lerner Associates Inc., claiming that the longtime share value of $11 for its Apple REITs was unreasonable in the face of market fluctuations and other events. Finra’s investor alert comes as the nontraded-REIT industry registers strong sales.
The InvesterNews.com article says that investors bought close to $4.6 billion in nontraded REITs through June 30, according to two consultants who follow the industry. That put sales on a pace to top 2010′s full-year total of about $8.4 billion, the third-highest ever, according to Direct Investments Spectrum, a newsletter that follows the nontraded-REIT marketplace.
“Nontraded REITs are generally illiquid, often for periods of eight years or more,” Finra said. “Early redemption of shares is often very limited, and fees associated with the sale of these products can be high and erode total returns.” Front-end fees can be as much as 15% of the per-unit price, Finra said. Front-end underwriting fees for publicly traded REITs may be 7% or more of the offering proceeds, plus a brokerage commission for investors who buy shares in the open market, according to Finra.
The regulator in its alert highlighted a number of “complexities and risks” associated with the product.
Kelly writes that one such “risk” is nontraded REITs’ dividends, which are an essential component to attracting investors to the product. Known as “distributions” in the industry, they “are not guaranteed and may exceed operating cash flow,” according to Finra. “Distributions can be suspended for a period of time or halted altogether,” according to the Finra alert.
Kelly concludes that some leading REIT sponsors that struggled during the credit crisis cut investor distributions. Michael Stubben, president of MTS Research Advisors, which analyzes nontraded REITs, pointed out that Finra’s attention to nontraded REITs is “probably driven by the struggles of some older programs” that cut dividends and saw valuations fall. It’s also aimed, he added, at “getting advisers to understand the risks” of the products..
Securities Attorney, Lars Soreide, of Soreide Law Group, PLLC, has represented clients nationwide. If you feel you have become a victim of the sale of unsuitable REITs by your broker/dealer, call a Securities Arbitration Lawyer for a free consultation on how to potentially recover your losses. To speak with an attorney, call 888-760-6552, or visit www.securitieslawyer.com
Soreide Law Group, PLLC., representing investors nationwide before FINRA the Financial Industry Regulatory Authority.
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