The Financial Industry Regulatory Authority, also known as FINRA, has issued a notice on their website which provides guidance to broker/dealers on the communications they have with their clients regarding unlisted real estate investment programs, including unlisted real estate investment trusts (REITs) and unlisted direct participation programs (DPPs) which invest in real estate.
Recently, in some of the reviews FINRA has done with the public concerning REITs, they have found some of the communication with the public from their firms may have had inaccurate or misleading statements. Also, the distributions paid by these real estate programs, and the risks involved, may have not been explained properly to clients.
FINRA states that along with the benefits of the real estate programs, broker/dealers must also include the risks. The firms must make sure their clients understand how the products operate and should include a prospectus.
The firms' communications on real estate programs often include distribution rates. According to FINRA's rules the firms must not misrepresent the amount or composition of a real estate program’s distributions. They clearly state that the communications should be fair and balanced, and be clearly presented to the client.
The firm should provide a sound basis for evaluating the facts in regard to any particular security or type of security, industry or service regarding stability or its volatility.
A firm's discussion regarding liquidity events or the timing of such events must be factual and balanced.
The firm must make a fair comparison regarding the appropriate index.
A communication from a firm can include a capitalization rate for an individual property within a real estate program if that rate is based on the current information in the prospectus, and the communication explains how that rate was calculated. That the rate must apply to the individual property, and it can't reflect a return or distribution from the REIT or DPP itself.
This is a summation of the notice from FINRA's website, but there is much more information available on their website regarding this matter. FINRA's website is a great source of information to the investor.
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