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SII Investments Charged with Supervisory Issues Related to Non-Traded REITs

Posted on Wednesday, September 27th, 2017 at 7:46 am    

Erez Law is currently investigating SII Investments financial advisors who overconcentrated customer accounts in non-traded real estate investment trusts (REITs).

In September 2017, the Enforcement Section of the Massachusetts Securities Division of the Office of the Secretary of the Commonwealth charged SII Investments with unethical conduct related to the sale of non-traded REITs.

Pursuant to FINRA Rules, member firms are responsible for supervising a broker’s activities during the time the broker is registered with the firm. Therefore, SII Investments may be liable for investment or other losses suffered by its customers. According to the complaint, “SII has engaged in dishonest and unethical conduct and failed to supervise its agents by allowing systemic inflation of its clients’ liquid net worth while maintaining contradictory and unclear rules related to the purchase of non-traded real estate investment trusts.”

A REIT is a company, modeled after mutual funds, that owns or finances income-producing real estate and provide investors of all types regular income streams, diversification and long-term capital appreciation. Unlike other real estate investments, REITs are often entirely illiquid. Non-traded REITs hold additional risks for investors because they often feature limited redemption programs, high fees and commissions, and internal conflicts of interest.

SII Investments’ non-traded REITs were subject to high surrender fees and were listed as liquid regardless of any applicable surrender fees. According to the complaint, SII Investments failed to have proper policies and procedures in place that would have allowed its agents and sales supervisors to adequately determine if an annuity product was illiquid. “By including annuities subject to surrender fees as high as 10% in the calculation of a client’s liquid net worth on suitability and disclosure forms, SII caused non-traded REITs to be sold by its agents in a manner not compliant with the Act,” according to the complaint.

Additionally, SII’s forms and disclosures and the Commonwealth of Massachusetts’s policy provided that, “no more than 10% of a client’s liquid net worth can be concentrated in one specific non-traded REIT and no more than 20% of a client’s liquid net worth can be concentrated in non-traded REITs in general.” FINRA defines annuities with surrender fees as long-term and illiquid investments, and “by including these annuities in the calculation of a clients’ liquid net worth, SII inflated their clients’ liquid net worth, thus allowing the firm and its agents to bypass both internal concentration limits and prospectus limits for client investments in non-traded REITs.”

SII Investments had internal compliance procedures to put the 10% cap on how much of the asset can be held in a client portfolio, however the complaint alleges that SII Investors did not put the cap into place.

According to the complaint, between 2011 and 2016, SII Investments sold 93 non-traded REITs to residents of Massachusetts with a value of $4.7 million, resulting in director commissions of approximately $27,162 and agents received commissions totalling approximately $278,166.

Erez Law represents investors in the United States for claims against SII Investments financial advisors who overconcentrated customer accounts in non-traded REITs. If you have experienced investment losses, please call us at 888-840-1571 or complete our contact form for a free consultation. Erez Law is a nationally recognized law firm representing individuals, trusts, corporations and institutions in claims against brokerage firms, banks and insurance companies on a contingency fee basis.