FINRA Sanctions Cetera Investment Services Over Non-Traded REIT Practices

The Financial Industry Regulatory Authority (FINRA) fined (Case No. 2014042566201) brokerage firm Cetera Investment Services LLC (Cetera) concerning allegations between April 1, 2009, to April 30, 2014 Cetera failed to apply volume discounts to eligible purchases of non-traded real estate investment trusts (Non-Traded REITs) and business development companies (BDCs). In addition, FINRA alleged that Cetera failed to have an adequate supervisory system and written supervisory procedures designed to ensure customers received appropriate volume discounts on Non-Traded REITs and BDCs.

Cetera is a self-clearing brokerage firm based in St. Cloud, Minnesota and has 1,482 branch offices and approximately 1,891 registered representatives.

As a background, a Non-Traded REIT is a security that invests in different types of real estate assets such as commercial, residential, or other specialty niche real estate markets such as strip malls, hotels, storage, and other industries. There are also publicly traded REITs that are bought and sold on an exchange with similar liquidity to traditional assets like stocks and bonds. However, Non-traded REITs are sold only through broker-dealers, are illiquid, have no or limited secondary market and redemption options, and can only be liquidated on terms dictated by the issuer, which may be changed at any time and without prior warning. A BDC is an investment company that invests in certain private or thinly traded public companies and shares many structural similarities to Non-Traded REITs.

Non-traded REITs and BDCs may offer volume discounts to investors where the price per share received by the investor is discounted when the investor reaches an accumulated level. The volume discount offering terms are set in the offering's prospectus. In order to fund the discount the broker’s selling commission paid by the investment product's wholesaler to the broker-dealer is reduced.

FINRA found that Cetera failed to identify and apply volume discounts to ten customers who were eligible for the discount resulting in excessive sales charges of approximately $18,000. FINRA also found that Cetera failed to establish an adequate supervisory system with respect to the sale of Non-Traded REITs and BDCs. FINRA found that Cetera’s procedures were not reasonably designed to identify accounts that would be eligible for volume discounts. Instead, FINRA alleged that the firm relied on its brokers to ensure customers received the volume discounts but did not provide guidelines, instructions, or policies for brokers and supervisors to follow.

Investors who have suffered losses may be able recover their losses through securities arbitration. The investment attorneys at Gana Weinstein LLP are experienced in representing investors in cases where their broker has acted inappropriately. Our consultations are free of charge and the firm is only compensated if you recover.