With increasing frequency, given the current low interest rate environment, retail investors are steered into investing in products appearing to offer more advantageous yields than are available in traditional interest-bearing investments such as money market funds and CDs.  One example is the publicly registered non-exchange traded real estate investment trust (“REIT”) or “non-traded REIT.”  While non-traded REITS share certain similarities with their exchange-traded brethren, they differ in a number of key respects.

15.6.15 money whirlpool

CHARACTERISTICS AND SOME DISADVANTAGES OF NON-TRADED REITS

To begin, a non-traded REIT is not listed for trading on a securities exchange.  Consequently, the secondary market for non-traded REITs is typically very limited in nature.  Furthermore, while some of an investor’s shares may be eligible for redemption after a certain passage of time (e.g., one year), and, even then, on a limited basis subject to certain restrictions, such redemption offers may well be priced below the purchase price or current price of the non-traded REIT.  Thus, lack of liquidity and pricing inefficiency are two disadvantages to non-traded REITs, as opposed to REITs that trade on an exchange (e.g., NYSE: BXP – Boston Properties).

Beyond such liquidity and pricing concerns, non-traded REITs often are sold with very high front-end fees.  These fees may include selling compensation and expenses (not to exceed 10%), as well as additional offering and organizational costs which are essentially passed along to the investor from the outset.  Conversely, purchasing a REIT which trades on a major exchange will only entail the associated brokerage commission.  Because of the fees associated with non-traded REITs, they are rarely suitable for an investor with a short-term time horizon; even long-term investors must remain mindful of the liquidity issues.

Finally, with non-traded REITs, investors may not always be aware of the anticipated source of returns on the underlying investments.  Often, with a non-traded REIT, income is passed along to the investors from distributions over several years – and it may also be the case that the income distributions include return of capital from other investors.  And upon liquidation, investors in a non-traded REIT may receive less than their initial investment depending on the value of the underlying assets. On the other hand, investors who purchase exchange traded REITS are typically seeking capital appreciation on the share price, in addition to income via dividends or distributions to shareholders.

RESOURCE OFFICE INNOVATION REIT

Recently, one such non-traded REIT – Resource Office Innovation REIT (“Resource Office”) – elected to suspend its public offering, effective April 21, 2017.  Resource Office’s suspension of its offering was approved by its Board in connection with a plan to restructure its $1.1 billion IPO into a NAV REIT, as well as a perpetual life entity that will give the company the ability to conduct offerings for indefinite duration.  In addition to suspending its offering, Resource Office’s Board voted to suspend the company’s distribution reinvestment plan effective May 1, 2017, as well as its share repurchase program effective May 21, 2017.

If you have invested in a non-traded REIT that you believe was an unsuitable recommendation, and you have suffered significant losses as a result, you may be able to recover your losses in FINRA arbitration.  To find out more about your legal rights and options, contact a securities arbitration lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or newcases@investorlawyers.net for a no-cost, confidential consultation.

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The State of Illinois Securities Department (“Department”) recently initiated enforcement proceedings against Thrivent Investment Management, Inc. (“Thrivent”) (CRD #18387) for allegedly violating the Illinois Securities Law of 1953 in connection with sales of unsuitable variable annuity (“VA”) products to certain of its clients who already held Thrivent VA’s.

Abstract Businessman enters a Dollar Maze.

Specifically, the Department alleges that Thrivent violated the Act by “… replacing its clients’ existing variable annuities for new variable annuities which required the clients to pay surrender charges and various fees.”   According to the Department, possible violations of law in the case include (i) failure to maintain and enforce a supervisory system with adequate written procedures to achieve compliance with applicable securities laws and regulations, (ii) failure to adequately review the sales and replacements of VA’s for suitability, (iii) failure to enforce its written procedures regarding documentation of sales and replacements of VA’s, and (iv) failure to adequately train its salespersons, registered representatives and principals.

Prior to 2012, Thrivent rolled out a new feature to its VA.  This feature consisted of adding a Guaranteed Lifetime Withdrawal Benefit (“GLWB”) to the VA in return for a rider fee.  During the time period of January 2011 – June 2012 and July 2013 – June 2014, Thrivent allegedly recommended that certain customers purchase new variable annuities with GLWB riders to replace existing variable annuities, without performing any analysis of whether the customers would economically benefit from the variable annuity switch.  Some customers who were advised to switch allegedly would have received greater payments over the life of the policies if they had kept their original variable annuities in place.

In general, VA products have a checkered history with regulators.   Both the Financial Industry Regulatory Authority (“FINRA”) and the Securities & Exchange Commission (“SEC”) have issued numerous rulings, advisory documents and investor alerts warning that the sale of VA’s might be unsuitable and inappropriate under certain circumstances.  Specifically, the SEC has warned about the risks and costs of switching VA contracts, encouraging investors to consider whether they can buy the insurance features embedded in a VA less expensively as part of the VA or separately.  FINRA has warned investors that switching, or exchanging, a VA contract is generally not a good idea, due to bonus recapture charges, surrender charges, higher charges accompanying the new contract, unnecessary riders on the new contract, and whether the advisor is motivated by commissions.

When a broker or financial advisor recommends that a client purchase or sell a security, the broker must have a reasonable basis for believing that the recommendation is suitable for the investor.  In making this assessment, a broker must consider the investors income and net worth, investment objectives, risk tolerance, and other security holdings.

If you received an unsuitable recommendation of securities from a broker or investment adviser, including variable annuities, and suffered significant losses are a result, you may be able to recover your losses in FINRA arbitration. To find out more about your legal rights and options, contact a securities arbitration lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or newcases@investorlawyers.net for a no-cost, confidential consultation.

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Former NEXT Financial Broker Douglas P. Simanski Barred for Alleged Theft

October 13, 2016

  Financial Industry Regulatory Authority (FINRA) records indicate that Douglas P. Simanski (Simanski), a former stockbroker who was associated with NEXT Financial Group, has been permanently barred from the brokerage industry.  Simanski’s record also shows 4 currently pending customer disputes, 1 prior final customer dispute and a recent employment separation after allegations. FINRA is the agency that licenses and regulates […]

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Platinum Partners Hedge Funds Under Scrutiny

October 13, 2016

Platinum Partners LP Funds are under scrutiny after federal agents reportedly raided the funds’ New York offices in July 2016.  Hedge fund entities sponsored by Platinum Partners include the Platinum Partners Value Arbitrage Funds, the Platinum Partners Credit Opportunities Fund, Platinum Credit Holdings LLC, Platinum Credit Management LP, Platinum Partners Value Corp., and Platinum Management […]

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FINRA Fines Investors Capital Over Unit Investment Trust Sales

October 13, 2016

The Financial Industry Regulatory Authority (FINRA) recently fined Investors Capital Corporation $250,000 over the sale of unit investment trusts (UITs).  Investors Capital did not admit or deny the allegations leading to the fine, but also agreed to pay $841,500 in restitution to customers, bringing its total payment to over $1 million. FINRA alleged that certain […]

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FINRA Fines Merrill Lynch Over Sales of Strategic Return Notes

October 6, 2016

The Financial Industry Regulatory Authority (FINRA) fined Merrill Lynch, Pierce, Fenner & Smith, Inc. $5 million for alleged negligent disclosure failures in connection with the sale of five-year senior debt notes to retail customers. In particular, Merrill Lynch allegedly failed to adequately disclose certain costs, making it appear that the fixed costs were lower than they […]

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SEC Fines UBS Over Sales of Reverse Convertible Notes

October 6, 2016

  The U.S. Securities and Exchange Comission (SEC) has reached an agreement with UBS under which UBS will pay more than $15 million to settle claims arising out of its sale of hundreds of millions of dollars of reverse converible notes to customers. According to the SEC, UBS sold about $548 million dollars of “reverse […]

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FINRA Fines Investors Capital for Alleged Unsuitable UIT Sales

October 6, 2016

  Investors Capital will pay $1.1 million in fines and restitution over the sale of unit investment trusts (UITs) to resolve an investigation by the Financial Industry Regulatory Authority Inc. (FINRA).  FINRA alleges that certain Investors Capital brokers recommended unsuitable short-term trading of UITs and other complex financial products known as steepener notes in accounts […]

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Former InterSecurities Broker Harry Hammond Suspended For Unapproved PIPE Transactions

February 19, 2016

According to the Financial Industry Regulatory Authority (FINRA), former InterSecurities, Inc (InterSecurities), now known as Transamerica Financial Advisors, Inc. (Transamerica), broker Harry Hammond (Hammond) was suspended from the securities industry for 12 months for allegedly referring 24 clients to invest with Nutmeg Group, LLC (Nutmeg) a firm specializing in Private Investment in Public Equity (PIPE) […]

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36 Oil and Gas Companies Filed For Bankruptcy In 2015

February 19, 2016

Law Office of Christopher J. Gray wishes to alert investors to the possibility that recommendations of oil and gas investments by broker-dealers may be unsuitable, depending on the individual characteristics of investors and whether the broker had a reasonable basis for the recommendation. According to a Wall Street Journal article, there have been a total […]

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