FINRA’s concern with the marketing of real estate-related products is reaching fever pitch. Its recent Regulatory Notice draws recent reviews of communications and findings in recent FINRA disciplinary actions, and gives firms a “how to list” for marketing communications and disclosure involving unlisted, or non-traded, real estate investment trusts (REITs) and real estate direct participation programs (DPPs). Note that FINRA’s guidance applies equally to communications regarding registered and non-registered real estate investment programs.

In its Notice, FINRA identified several areas where members’ communications may not be consistent with the requirement that communications with the public be fair, balanced and not misleading. These include:

• Communications with the public must balance the discussion of the potential benefits of investing in REITs or DPPs with the risks of such investments.
• Discussions of investment objectives should state that there is no assurance that investment objectives will be met.
• Communications should not imply that an investment in a REIT or DPP is a direct investment in real estate.
• If a REIT is not yet qualified under the tax code, marketing communications should clearly disclose that fact and the possibility that the program may not qualify as a REIT in the future.
• Marketing communications that include distribution rates must disclose that distribution rates are not guaranteed and may be modified.
• If the distribution rate consists of return of principal or borrowings, the firm should provide a breakdown of the portions of the distribution rate that result from cash flow from operations, return of principal and borrowings.
• REIT and DPP communications may not include an annualized distribution rate until the program has paid distributions that are, on an annualized basis, at a minimum equal to that rate for at least two consecutive full quarterly periods.

FINRA also identified several specific areas where members should ensure that they are providing investors with enough information to evaluate the investment or adequately balancing the discussion of the potential benefits of investing in a REIT or DPP with the risks of those investments:

• A firm may not assert or imply that the value of a real estate investment program is stable or that its volatility is limited without providing a sound basis to evaluate this claim.
• Marketing communications should clearly and prominently explain the restrictions and limitations of any redemption features or liquidity features of a REIT or DPP.  In particular, the fact that a program has not previously satisfied investor redemption requests should be disclosed.
• Members cannot “cherry-pick” prior performance information for related or affiliate programs.
• Communications that use a real estate index’s performance to demonstrate the sector’s risk or return characteristics should make clear that index performance is not that of a particular real estate program, describe the components of the index, and identify any relevant differences between the index components and the REIT or DPP portfolio investments.
• If communications include pictures of properties owned by other investments managed by a program’s sponsor, they must include prominent text explaining that the property is owned by a different investment managed by the sponsor and not the current program.

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