Independent Financial Group Censured and Fined After Rule Violations on Suitability and Supervision Involving Non-Traded REITs
A FINRA regulatory sanction was finalized against Independent Financial Group, LLC (CRD No. 7717) on April 8, 2021, imposing a censure and $200,000 fine, and requiring certification supervisory procedures. The Financial Industry Regulatory Authority recently took action against Independent Financial Group, LLC which offers investment products to retail customers through more than 650 registered representatives and more than 350 branch offices, organized through its main office in San Diego, CA.
Unsuitable Recommendations and a Lack of Supervision
The FINRA complaint stated that over eight years from 2008-20016, the company did not provide reasonable supervision to one of its former registered representatives. This representative had made unsuitable recommendations to IFG customers, including suggesting that retiring customers use retirement funds and liquid assets in speculative and illiquid securities. In particular, this representative suggested non-traded REITs and unstructured notes that were not approved by IFG. When IFG became aware of the situation, they failed to take reasonable action by investigating or stopping it, even though the broker had several complaints filed against him and his supervisors noted irregularities and red flags. Although a heightened supervision plan was developed on two occasions, it was not fully implemented either time.
Multiple Rule Violations
As a member firm, IFG agrees to uphold FINRA rules for itself and its associated financial advisors. In this case, the FINRA investigation determined that IFG violated Rule 3010. A firm is obligated to adequately supervise the work of each person associated with the firm to ensure adherence to securities rules and regulations, and ethical practices, and to investigate any red flags where potential misconduct is identified. While the firm was made aware of possible wrongdoing on the part of the broker, it did not appropriately take action and follow through on those allegations. The results of the FINRA investigation also showed that IFG violated Rule 2010.1, which requires that FINRA members’ actions be honorable and ethical when it comes to professional activities, and Rule 2111, which require that any recommendations made to customers are reasonable, given the investor’s investment profile, goals, financial situation, and related factors. The conduct of the registered broker did not meet acceptable professional standards, and the recommendations of non-traded REITs for inexperienced investors are not suitable.
Why Non-Traded REITs Require Caution
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.
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