FINRA Issues New Guidelines Concerning Broker Presentation of Risk and Reward

By on May 7, 2013

After reviewing recent communications between brokers and the public and finding a significant increase in misleading marketing, the Financial Industry Regulatory Authority (FINRA) announced new rules regarding how brokerage firms should present the risks and rewards of real estate investment trusts (REITs) and direct participation programs to investors.  

“[S]ome communications have contained inaccurate or misleading statements regarding the potential benefits of investing in real estate programs,” FINRA said in a regulatory filing.  “Other communications have emphasized the distributions paid by a real estate program and failed to adequately explain that some of the distribution constitutes return of principal, [or] not provided sufficient discussions of the risks associated with investing in the products in order to balance the presentation of benefits.” 

FINRA wants brokers to describe how investments operate and to be consistent with the REIT’s own prospectus, FINRA said.  FINRA also warned against “cherry picking” information about prior performance or other historical information about REITs or their affiliates when describing opportunities, and comparing them to a retail index’s performance without clearly disclosing all of the material differences between them. 

On October 22, 2012, FINRA fined brokerage firm David Lerner Associates Inc. $14 million for overcharging and misleading customers who bought bonds and invested in a $2 billion REIT, including $12 million in restitution to customers. 

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