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FINRA Releases Regulatory Notice To Broker-Dealers Regarding Communications With Investors Concerning Nontraded REITs and DPPs

On May 2, 2013, the Financial Industry Regulatory Authority, Inc. (“FINRA”) released Regulatory Notice 13-18 (“Regulatory Notice”) to broker-dealers concerning the shortcomings in the sales materials they disseminate to customers and investors regarding nontraded or unlisted real estate investment trusts (“REITs”) or direct participation programs (“DPPs”). FINRA Regulatory Notice 13-18. According to the Regulatory Notice, “REITs are pass-through entities that offer investors an equity interest in a pool of real estate assets, including land, buildings, shopping centers, hotels and office properties, and in some cases, mortgages secured by real estate. As defined in FINRA Rule 2310, DPPs are investment programs that provide for flow-through tax consequences regardless of the structure of the legal entity or vehicle for distribution.” FINRA released this Regulatory Notice in an effort to improve sales practices for the illiquid nontraded REITs and DPPs, which are primarily sold through independent broker-dealers such as LPL Financial LLC and Ameriprise Financial Services Inc. According to FINRA, reviews of broker-dealer’s communications with the public regarding REITs and DPPs revealed deficiencies in the communications as being unfair, not balanced and misleading. For example, the FINRA Regulatory Notice discussed how broker-dealers’ sales materials regarding dividends in the nontraded REITs and DPPs are misleading and contain several inaccuracies. Specifically, the FINRA Regulatory Notice states that the broker-dealers’ materials “have emphasized the distributions paid by a real estate program and failed to adequately explain that some of the distribution constitutes return of principal.” Further, according to FINRA, many broker-dealers’ communications with investors minimize the risks associated with REITs. The Regulatory Notice states, “some communications have not provided sufficient discussions of the risks associated with investing in the products in order to balance the presentation of benefits.” The Notice provides extensive guidance to firms to ensure that their communications with the public concerning REITs and DPPs comply with various industry and regulatory requirements.

Lax & Neville LLP has nationally represented small broker-dealers, financial services professionals and securities industry companies in regulatory matters and securities-related and commercial litigation. Additionally, Lax & Neville has extensive experience in successfully prosecuting claims on behalf of customers who have suffered losses as a result of sales practice abuses, including customers who have suffered losses as a result of their investment in REITs and DPPs. Please contact our team of attorneys for a consultation at (212) 696-1999.