State Securities Regulators Put Limits on Non-Traded REITs

Posted on September 17th, 2014 at 5:15 PM

From the Desk of Jim Eccleston at Eccleston Law Offices

The North American Securities Administrators Association (NASAA) plans to propose restrictions on non-traded REITs, aiming to add protections for investors who may not fully understand the risks, don't have sufficient resources, or lack future earnings capacity. The regulations will authorize states to fine or take other administrative actions against REITs that don’t comply. That will affect independent brokers as well, by exposing them to enforcement actions from state legislators if they don’t follow the regulations.

Non-traded REITs are sold directly to investors by financial advisers and brokers. They are not traded on exchanges like conventional REITs. Investors typically aren't able to sell their shares in the company until a “liquidity event” such as a sale, merger or listing of the whole company, takes place, which may or may not happen.  

Since 2009, sales of non-traded REITS have more than tripled. They boast of a 6% or higher payout even in a low-interest-rate environment.  However, many non-traded REITs pay those distributions to investors by using money raised from other investors or from loans, rather than from the operating profits of their real-estate portfolios.

Massachusetts has brought half a dozen enforcement actions against brokerages for improper sales of non-traded REIT shares in the past few years, including LPL Financial Holdings Inc., Ameriprise Financial Services Inc., Commonwealth Financial Network and Lincoln Financial Advisory Corp.

The attorneys of Eccleston Law Offices represent investors and advisers nationwide in securities and employment matters. Our attorneys draw on a combined experience of nearly 50 years in delivering the highest quality legal services.


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