After a review, the Wall Street watchdog, Financial Industry Regulatory Authority (FINRA), has warned brokerage firms about the way they market some real estate investment trusts (REIT).
FINRA said some communications promote REIT distributions that are paid to the investor as income but fail to explain adequately that those distributions include some return of principal.
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Since non-traded REITs do not trade on securities exchanges, they can be illiquid or difficult to sell in secondary markets.
REITs invest in commercial real estate, such as hotels and strip malls, allowing investors to profit from rising property values. Non-traded REITs often have higher fees for investors than publicly traded REITs.
Some communications that brokerages give investors to promote the securities do not adequately explain such risks to balance the presentation of benefits, FINRA said.
In addition, brokerages may not "cherry pick" historical performance information about REITs affiliated with current products they are pitching. Brokerage should include, with "equal prominence," all information about affiliated or related REITs, FINRA said.
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By GlobalDataThe group added that non-traded REITs are overseen by multiple regulators and that brokerages that offer them typically require clients to meet certain thresholds for income and assets available to invest before investing in the securities.
