Recently, a formerly-registered advisor who now practices as an IAR sought expungement of an occurrence filed by two customers in 2014. The investment in question was a real estate tenancy in common investment (TIC) that the customers purchased in 2008.
One of the two customers had just sold a real estate property and was seeking a Section 1031 exchange to avoid taxes on the sale. His investment in the TIC comprised about 10% of his portfolio. The other had also recently sold real estate property and was seeking to avoid taxes on the sale. His investment in the TIC comprised about 17% of his portfolio. Both customers’ investor profiles met suitability requirements, in that each had experience investing in real estate, an annual income of at least $150,000, a net worth of $1 - $5 million, a moderately aggressive to aggressive risk tolerance, and low to no liquidity needs. Both customers were seeking income and capital appreciation from the investment.
The Investors Complained After Holding the Investment for Six Years
Shortly after the customers’ 2008 real estate purchase, the world experienced one of the worst financial crises in history. Despite that the TIC actually performed as expected for some time, and it never lost principal value.
The customers voiced no concern over the investment for the next three years. In 2011, the advisor switched firms and did not bring the customers with him. Then, in 2014, the customers filed for FINRA arbitration against the advisor’s previous firm. The customers alleged over $600,000 in damages, some of which were punitive. The firm responded, denying all allegations against them and against the advisor, even though the advisor had not been named as a respondent. Eventually, the firm made a business decision to settle for a little over $97,000. It did not ask the advisor to contribute.
Luckily, the Advisor Was Able to Share Proof of Investment Suitability
At the advisor’s hearing for expungement of this dispute, he provided a copy of the PPM given to the customers, highlighting that each customer was accredited and met the suitability requirements of the TIC and illustrating that the PPM disclosed all risks associated with the investment. To corroborate his testimony regarding the customers’ investor profiles, the advisor supplied copies of the customers’ account applications.
The advisor testified to the extensive conversations he had had with each customer regarding the investment and to the volatile market conditions that followed shortly thereafter. He presented a copy of his previous firm’s response to the customers’ complaint, stating their position that the investment was, in fact, suitable for each customer. The advisor highlighted that he had been registered with FINRA for 14 years and had only received this one complaint. Neither customer submitted a response to the request for expungement, nor did they attend the hearing. The advisor’s firm did not oppose the request for expungement.
The Arbitrator Confirmed the Economic Downturn, Not the Advisor, Was the Source of All Financial Loss
It is absolutely ludicrous that two accredited investors, each with real estate investment experience and moderately aggressive to aggressive risk tolerances, each seeking to avoid taxable gains from the sale of real estate, could even fathom making a claim that this investment was unsuitable for them. It is even more ludicrous that FINRA not only allowed, but required, such a far-fetched claim to be published on BrokerCheck. Luckily, the arbitrator hearing the case agreed, highlighting the customers’ experience with real estate investing, their desire for Section 1031 exchanges, and the fact that the subsequent financial crisis was truly to blame for any alleged losses. The advisor’s CRD record and BrokerCheck are now squeaky clean.
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