Here’s Why This Top Regulator is Suspicious of REIT Marketing

Accounting

William Galvin is the top financial regulator in Massachusetts. Having assumed the position of secretary of the commonwealth in 1995, Galvin may be more accurately described as an attack dog than a watch dog: He has helped return millions of dollars to investors by litigating against major financial institutions with abusive or misleading practices.

Most recently, he settled with five broker dealers for $11 million over improper sales of real estate investment trusts. Some REITs — typically those that are not publicly traded — are illiquid and can be incredibly difficult for someone to sell if they want out of the investment. REITs are a fairly complicated financial product, and only savvy and well-informed investors should get involved with them.

During his investigation into the broker-dealers, he found that they sold non-traded REITs to Massachusetts residents in excess of a 10 percent maximum concentration limit imposed by regulations.

To make a long story short, the investigation into the broker-dealers over the selling practices of non-traded REITs apparently raised Galvin’s suspicions. If these broker-dealers gamed the system — by selling non-traded REIT investments to people who did not necessarily have the net worth or income regulations deemed appropriate to assume the risk — then surely there are other financial institutions out there trying to sell more product that they are supposed to.

In this spirit, Galvin has subpoenaed 15 brokerage firms as part of an investigation into the marketing of complicated financial instruments — such as non-traded REITs — to the elderly.

“These things are accidents waiting to happen when they are sold to inexperienced investors,” Galvin said in a statement, according to The New York Times. “It’s the whole methodology by which these products are sold — that’s the bigger problem.”

Galvin continued, “While these products are not unsuitable in and of themselves, they are accidents waiting to happen when they are sold to inexperienced investors by untrained agents who push the products to score the large commissions.”

Some of the brokerages targeted include units of Bank of America (NYSE:BAC), Morgan Stanley (NYSE:MS), and Wells Fargo (NYSE:WFC). It’s important to point out that the Galvin is simply opening an investigation, and is not alleging any wrongdoing yet.

Once upon a time, most non-traded REIT investments were limited to relatively wealthy individuals: those with a net worth of more then $1 million, or those with substantial proven income. However, the recent low-yield environment has helped encourage investors and brokers to pursue riskier products with better returns, and some REITs fall into that basket.

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