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Wells Investment Securities Fined $300,000 for Misleading Advertisements in REIT Offering

Monday, November 28, 2011

Yoomi Lee | Bloomberg LawFINRA News Release, FINRA Fines Wells Investment Securities $300,000 for Use of Misleading Marketing Materials for REIT Offering(Nov. 22, 2011); FINRA Letter of Acceptance, Waiver and Consent No. 2009019893801 (Nov. 21, 2011) The Financial Industry Regulatory Authority (FINRA) announced that Wells Investment Securities, Inc. (WIS) submitted a Letter of Acceptance, Waiver and Consent to settle charges for using misleading marketing materials in connection with the sale of Wells Timberland REIT, Inc. (Wells Timberland), a non-traded Real Estate Investment Trust (REIT). Without admitting or denying the charges, WIS accepted censure and consented to a $300,000 fine. In determining the appropriate sanctions, FINRA considered WIS's proactive measures in conducting an investigation and notifying the appropriate authorities and affected customers.

Misleading Advertisements

According to FINRA, WIS was the dealer manager and wholesaler for the public offering of Wells Timberland. FINRA alleged that from May 21, 2007 through September 30, 2009, WIS reviewed, approved, and distributed at least 116 communications for Wells Timberland that contained misleading or exaggerated statements, or failed to disclose material information. For example, the marketing materials purportedly failed to disclose the significance of Well's Timberland's non-REIT status or contained misleading statements suggesting that Wells Timberland was a REIT at a time when it had not so qualified. Specifically, the initial offering prospectus stated that Wells Timberland intended to qualify as a REIT for the year ending December 31, 2007, even though it could not qualify for REIT election until December 2009 due to certain restrictions. Further, Wells Timberland communications allegedly contained other misleading statements, including, among other things, (1) portfolio diversification, (2) the ability to make distributions and redemptions, and (3) investment benefits. Accordingly, FINRA charged that WIS violated NASD Rules 2110, 2210(d)(1)(A), 2210(d)(1)(B), 2211(d)(1), and FINRA Rule 2010.

Inadequate Supervisory Procedures

FINRA also alleged that WIS's numerous failures to comply with FINRA's advertising content rules were pervasive throughout the materials used in its promotion of Wells Timberland, indicating that WIS failed to implement its supervisory system effectively from May 21, 2007 through September 30, 2009. As such, FINRA claimed that WIS violated NASD Rules 3010(a), 2110, and FINRA Rule 2010. Finally, FINRA alleged that WIS violated Rule 30 of Regulation S-P because it failed to establish and maintain a supervisory system reasonably designed to safeguard confidential customer information. Specifically, WIS did not have procedures for the encryption of data while stored on laptops, which resulted in 37,864 customers' personal and confidential information being placed at risk when a laptop containing this information was stolen. DisclaimerThis document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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