Non-traded REITS Exhibit Unbelievable Resistance to FINRA Disclosure Rules

The non-traded real estate investment trusts industry wants to delay the implementation of the Financial Industry Regulatory Authority disclosure rule until the end of 2015. The rule would require that investors be given more accurate data about the valuation of direct participation programs and non-traded REITs.

This should provide investors with a more accurate picture of how much it costs to buy non-traded REIT shares. Currently, the self-regulatory authority’s proposal would put the rule change into effect at the end of 2014, which would be about six months after obtaining Securities and Exchange Commission approval.

Almost all non-traded REIT vendors are independent brokerage firms. Generating close to $20 billion in sales last year, which is twice as much as the year prior, broker-dealers and their representatives have gotten commission boosts due to their typical 7% commission.

If the disclosure rule is approved, broker-dealers would no longer be able to list a non-traded REITs per-share value at $10, which is the price their clients would typically pay. Instead, commissions and fees paid to dealer and broker managers would have to be factored. This would lower the share price on every customer account.

In a letter to the SEC, the Investment Program Association said it is asking for an 18-month implementation period to avoid unfavourable consequences not just for non-traded REIT industry and others that depend on unlisted DPPs and REITs as capital sources, but also for investors.

The industry trade group wants to slow down changes to the way REIT valuations are presented on client account statements and give brokerage formers and non-traded REIT sponsors more time to make adjustments to any new requirements. Already, contends IPA Chairman and Carey Financial President Mark Goldberg, the expected changes are having a negative impact on new offerings of Nontraded REITs and DPPs.

Goldberg says that the industry supports greater disclosure as well as the reduction of commissions. He also wrote that net investments should be calculated by just subtracting dealer manager fees and commissions. He believes this is in line with the “point of sale cost deduction approach” employed for other securities.

Commenting on the industry’s move to delay the implementation of the disclosure rule, Shepherd Smith Edwards and Kantas, LTD LLP Founder and stockbroker fraud lawyer William Shepherd said: “Any attempt to delay implementation of new rules to help investors know the true value of any investment is scandalous. Consumer protection groups have often been critical of FINRA, which is a trade association itself operated by the brokerage industry. Yet, financial advisory firms are fighting to keep from being subject even to FINRA regulation. By now opposing a requirement of greater disclosure of the true value of non- traded (and often unmarketable) REIT investments, we see just how far a financial investment trade organization will go to obscure information regarding problem investments such as many of these REIT’s!”

If you think that your non-traded REIT losses are a result of securities fraud, please contact our stockbroker fraud lawyers immediately. We represent retail and institutional investors in getting their non-traded REIT investment losses back.

Nontraded REITs want delay in Finra’s proposed disclosure rule, InvestmentNews, March 14, 2014

Download the Investment Program Association’s Letter (PDF)

More Blog Posts:
FINRA Bars Ex-LPL Broker Over Nontraded REIT Sales, Stockbroker Fraud Blog, December 27, 2013

Securities America, Ameriprise, Among Independent Broker-Dealers Charged $10.75M by Massachusetts for Nontraded REIT Sales, Stockbroker Fraud Blog, September 4, 2013

Mortgage REITs See a Slump, Institutional Investor Securities Blog, August 14, 2013