Best Interest Rule Violation Cited in Unsuitable REIT Recommendation and Overconcentration

Attorney Advising Disclaimer

FINRA enforced the three-year-old Regulation Best Interest rule to discipline a broker who put 81% of his customer's net worth into one non-traded real estate investment trust (REIT). FINRA found that the REIT itself cautioned investors regarding its elevated risk—to the tune of a potential "complete loss of principal"—and that the First Southern LLC broker nonetheless recommended a client with limited investment experience and moderate risk tolerance to invest 81% of his liquid net worth into the REIT.

The Securities and Exchange Commission (SEC)'s circa-2020 Regulation Best Interest aka Reg BI explicitly warns broker-dealers not to put their financial interests ahead of their customer's interests and to provide written disclosure of all material facts relative to investments, such as the heightened risk of more complex investments, such as REITs.

In the case of First Southern, FINRA found that broker Elba Nogueras received a $5,670 commission from the $81,000 sale. Due to the REIT's excessive riskiness and the high percentage of the customer's net worth concentrated in the single REIT—81%—FINRA determined that Nogueras and First Southern failed to comply with Reg BI and may have put their interests ahead of those of their client.

FINRA previously disciplined brokers for violating suitability rules, such as its $400,000 restitution order against Centaurus Financial of Anaheim, CA and former broker Donnie Ingram for unsuitable unit investment trust (UIT) and REIT recommendations, including Bluerock Residential Growth REIT and MacKenzie Realty Capital.

In addition to enforcing the existing suitability guidelines, Reg BI allows FINRA, SEC, and other regulators to crack down on violative brokers and investment advisers who fail to put their customer's interests before their own.

If you invested with any broker-dealer whose unsuitable REIT recommendations or other actions that were not in your best interests, such as excessive transactions or overconcentration, have resulted in damages or losses, please call an experienced FINRA arbitration attorney at The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.

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