Tuesday, May 31, 2011

FINRA Press Release: Non-Traded REITs

FINRA Charges David Lerner & Associates Over Sale of Non-traded Apple REITs
The Financial Industry Regulatory Authority (FINRA) issued a press release yesterday in which it announced that it had
filed a complaint against David Lerner & Associates, Inc. (DLA), of Syosset, NY, charging the firm with soliciting investors to purchase shares in Apple REIT Ten, a non-traded $2 billion Real Estate Investment Trust (REIT), without conducting a reasonable investigation to determine whether it was suitable for investors, and with providing misleading information on its website regarding Apple REIT Ten distributions.
The Statement of Complaint can be found here.

Real Estate Investment Trusts (REITs) are trusts that invest in real estate. Many investors think that REITs are similar to fixed income as they pay a yearly payment as is similar to a dividend payment, but they are not. They receive special tax treatment that allows them not to pay corporate income tax. In order to receive this special tax treatment REITs are required to distribute at least 90% of their income to their investors. This is a structure that is analogous to a mutual fund albeit it invests in real estate. REITs can be publicly traded or privately held. Public REITs need to file quarterly report with the SEC and trade on exchanges similarly to stocks. Private REITs are usually sold as private placements by an underwriter using a broker. Private placements are subject to less regulation, scrutiny, and disclosure than public ones. Moreover, private REITs are very illiquid.

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