On November 22, 2011, the Financial Industry Regulatory Authority (FINRA) announced that fined Wells Investment Securities, Inc. $300,000 for using misleading marketing materials in the sale of Wells Timberland REIT, Inc., a non-traded Real Estate Investment Trust (REIT). This is yet another in a long line of stockbroker negligence matters for which FINRA has levied regulatory fines.
Wells was the dealer-manager and wholesaler for the Wells Timberland REIT securities offering. The issuer of the REITs invested in timber-producing land. As the wholesaler, Wells reviewed, approved and distributed the marketing materials for Wells Timberland. FINRA found that from May 2007 through September 2009, the advertising and sales materials for the REITs contained misleading, unwarranted or exaggerated statements. For example, the initial offering prospectus stated that it intended to qualify as a REIT for the tax year that ended Dec. 31, 2006. But the REIT did not qualify for REIT election until the tax year that ended Dec. 31, 2009. The majority of the advertisements and sales literature failed to disclose the significance of Wells Timberland’s non-REIT status or suggested that Wells Timberland was a REIT at a time when it had not yet qualified as a REIT. The documents also contained misleading statements regarding Wells Timberland’s portfolio diversification and ability to make distributions and redemptions.
REITs generally are illiquid for a number of years. But they can avoid certain tax consequences if they qualify as a REIT under certain Internal Revenue Service requirements. The misleading marketing materials did not make it clear that the investments were yet qualified as REITs and, therefore, would not provide investors with the tax benefits associated with REITs.
FINRA’s Executive Vice President and Chief of Enforcement said that, “Wells misled investors into thinking Wells Timberland was a REIT at a time when it was not a REIT.” The FINRA executive further stated that, “Firms need to be mindful that investors rely on marketing materials to disclose truthful, accurate and up-to-date information to help inform their investment decisions.”