SIE Understanding Products and Their Risks Question 76: Answer and Explanation

Question: 76

Which of the following statements is true regarding Real Estate Investment Trust (REITs)?

• A. REITs are covered by the FINRA Rule 2310 definition of Direct Participation Programs.
• B. The Securities Act of 1933 defines REITs.
• C. The Investment Company Act of 1940 defines REITs.
• D. Under the Internal Revenue Code, REITs' earnings are taxed twice.

Correct Answer: B

Explanation:

B: Choice B is true because the Securities Act of 1933 determines that REITs are securities, and so a prospectus must be provided to any person who buys ownership when first issued in the primary market. Choice A is incorrect because the following are specifically excluded from FINRA Rule 2310: REITs, Section 401 plans, Section 403(a) plans, Section 403(b) plans, and Section 408 IRA plans. Choice C is incorrect because REITs were not covered in the 1940 act that regulates mutual funds. Choice D is incorrect because a primary advantage of REITs is that, if certain Internal Revenue Code conditions are met, the tax efficiency of REITs may be considered superior to mutual funds, whose ordinary dividends and interest payments and capital gains are taxed at the individual level, as well as at the corporate level.