FINRA Charges BD for Failing to Second-Guess NAVs
FINRA has charged a broker-dealer that served as the sole underwriter of non-traded REITs with failing to conduct reasonable due diligence to ensure suitability of its recommendations to customers. FINRA charges that the firm should have conducted an investigation because the NAVs of the REITs did not change during the commercial real estate downturn. According to FINRA, the broker-dealer accepted the issuer’s valuations and recorded them on customer account statements. FINRA also charges that the broker-dealer failed to disclose that distributions were generated from debt rather than return on the underlying properties.
OUR TAKE: FINRA seems to be merging suitability with an underwriter’s due diligence obligations under the Securities Act. The industry needs clearer guidance on the due diligence obligations of a broker-dealer, distributor, and underwriter, as the case may be, and what “red flags” require further investigation.