FINRA Accepts Settlement Offer From Cabot Lodge Securities After Alleged Violations of Supervisory and Suitability Rules
The Financial Industry Regulatory Authority (FINRA) accepted an offer of settlement from Cabot Lodge Securities LLC (CRD No. 159712) on April 6, 2021, after an investigation into violations of the agency’s supervisory and suitability rules. Cabot Lodge Securities LLC (CRD No. 159712) has been a FINRA member since August 2012 and is headquartered in New York. As a full-service broker-dealer, it employs more than 150 registered representatives across more than 115 branch offices; however, most of its revenues come from underwriting activities.
According to FINRA, over a nearly four-year period from August 2012 to February 2016, Cabot Lodge Securities LLC participated in an initial public offering (“IPO”) of a non-traded real estate investment trust (REIT) in which the amount of organization and offering expenses (O&O) exceeded fair and reasonable limits, and compensation to Cabot Lodge representatives was not disclosed. These failures resulted largely from Cabot Lodge’s failure to supervise its underwriting and sales of the REIT, which was its main product during this period. Cabot Lodge also made an unsuitable recommendation to an elderly customer.
The FINRA complaint also states that Cabot Lodge sought to become dealer manager for the REIT’s initial public offering or IPO nine months after it launched. At that time, O&O expenses exceeded reasonable limits under FINRA Rules, and Cabot Lodge submitted a plan to FINRA to address them. However, the Cabot Lodge team ignored their duty under the plan and FINRA Rules to adopt controls and to monitor O&O expenses. The amount of overall O&O expenses well exceeded 15 percent of the gross offering proceeds, and the underwriting compensation portion of the O&O expenses well exceeded 10 percent of the gross offering proceeds excluding securities purchased through the reinvestment of distributions.
In addition, Cabot Lodge participated in the IPO even though the fact that restricted shares of the REIT’s common stock were awarded to people related to the company was not disclosed in certain offering prospectuses as items of underwriting compensation, and Cabot Lodge did not have reasonable grounds to believe that such items were disclosed. Finally, Cabot Lodge did not have a reasonable basis to believe that its January 2016 recommendation that an elderly customer invests in the REIT was suitable based upon his investment profile.
Multiple Rule Violations
The FINRA investigation determined that the O&O expenses for the non-traded REIT exceeded the amount permitted by FINRA Rules 2310(b)(4) and 2010 and that the company failed to disclose that restricted shares of the REIT’s common stock were awarded to associated individuals as part of the underwriting compensation, as prohibited by FINRA Rules 5110(c), 2310(b)(3), and 2010. FINRA also determined that these violations were a result of Cabot Lodge failing to adhere to FINRA Rules 3110(a) and (b) and 2010, and NASD Rule 3010(a) and (b), requiring an adequate system of supervision, including underwriting procedures, to ensure compliance with Rule 5110 and 2310.
And lastly, Cabot Lodge was found in violation of FINRA Rules 2111(a) and 2010, due to the unsuitability of recommending that an elderly customer invests in a non-traded REIT based on the customer’s investment profile and related factors.
Why Non-Traded REITs Are a Concern
Non-traded REITs are specialized investment products not appropriate for every customer, especially recent retirees who may not be able to withstand a long period of illiquid assets. Non-traded REITs are securities that do not trade on a public securities exchange. For this reason, non-traded REITs can be illiquid, meaning investors may be unable to sell their investments on demand. A REIT may be organized as a corporation, trust or association. The underlying collateral of the REITs consists of income-producing residential or commercial real estate. Typically, the commissions generated on non-traded REITs are higher than the industry norm of approximately 7%, and the investments themselves may be subject to extreme volatility due to associated risk factors. Non-traded REITs are only suitable for investors with a long-term investment horizon who are willing to accept higher levels of risk in their investments.
The Wolper Law Firm represents investors nationwide in securities litigation and arbitration on a contingency fee basis. Matt Wolper, the Managing Principal of the Wolper Law Firm, is a trial lawyer who has handled hundreds of securities cases during his career involving a wide range of products, strategies and securities. Prior to representing investors, he was a partner with a national law firm, where he represented some of the largest banks and brokerage firms in the world in securities matters. We can be reached at (800) 931-8452 or by email at email@example.com.
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