Securities America Under Investigation in Nontraded REIT Probe

The Pennsylvania Department of Banking and Securities is looking into the sales of nontraded REITs by Securities America employees. Ladenburg Thalmann & Co. Inc., which owns the broker-dealer and two other independent brokerage firms, said in its yearly report that the state regulator wants the brokerage firm to provide data about nontraded REITs that Pennsylvania residents have been buying since 2007. The request was made in October.

According to InvestmentNews, it is not known at this time if Pennsylvania regulators are just looking at nontraded REIT sales at Securities America or the investigation extends to other firms. It was just last year that Securities America, along with other independent brokerage firms, settled with the Massachusetts Securities Division over nontraded REIT sales.

Securities America paid $8.4 million in restitution to clients in that state along with a $150,000 fine. According to that probe, firms had difficulties abiding by their own policies as well as to the Massachusetts rule that an investor’s purchase of REITs cannot go beyond his/her liquid net worth.

Each state has its own rules about how many alternative investments brokers can sell to clients. Often, the net worth of an investor impacts this amount.

In an Investor Alert, the Financial Industry Regulatory Authority outlined the risks involved in investing in a non-traded REIT:

• Distributions are not a guarantee and can be impacted by numerous factors.

• There are tax consequences to REIT status and distributions. Distributions for REITs that are from accumulated profits and earnings are taxed as if they are ordinary income. The rate could be up to 20% if you are in the highest tax bracket.

• Non-traded REITs are typically illiquid and come with valuation complexities.

• Early redemption can be costly and is frequently restrictive.

• Fees may accrue, adding to the expenses associated with nontraded REITs. For example, front-end fees alone can take the form of selling compensation and costs, as well as organizational and offering costs.

• Properties are frequently unspecified, which means many non-traded REITs begin as blind pools.

• Nontraded REITs can offer limited diversification.

• The real estate risks are real.

If you are considering investing in nontraded REITs, FINRA says that you should know about and understand what you are getting involved in. Find out what kind of fees your financial representative or his/her firm will be paid in commissions and fees. Make sure that this type of security is suitable for your portfolio and you can handle the degree of risk involved. Will this investment help you meet your long-term investment goals? You want to work with a brokerage firm and financial representative that know what they are doing.

Unfortunately, there are investors who have been persuaded to invest in non-traded REITs but were not apprised of the risks, conditions, or costs involved. If you believe that you were misled by a brokerage firm into getting involved in these investments and you have sustained losses because of it, contact Shepherd Smith Edwards and Kantas, LTD LLP. One of our non-traded REIT fraud lawyers would be happy to offer you a free case assessment.

Securities America focus of second state nontraded-REIT inquiry, Investment News, March 19, 2014

Public Non-Traded REITs-Perform a Careful Review Before Investing

More Blog Posts:

FINRA Bars Ex-LPL Broker Over Nontraded REIT Sales, December 27, 2013

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

FINRA Plan May Dramatically Change The Way Brokerage Firms Report On Nontraded REITS & Other Illiquid Investments on Client Statements, Institutional Investor Securities Blog, April 28, 2013