Table of Contents
- Alternative Investment Claims: A Beginner’s Guide to Illiquid Securities Arbitration Cases
- What Are Illiquid Securities?
- Why Do These Cases Often Go To FINRA Arbitration?
- What Makes An Alternative Investment Claim Different From A Stock Claim?
- What Kinds Of Investments Commonly Appear In These Cases?
- Non-Traded REITs
- Non-Publicly Traded BDCs
- Private Placements
- Other Alternative Products
- What Are Investors Usually Claiming In These Arbitrations?
- Unsuitable Or Poorly Matched Recommendations
- Misrepresentation Or Omission
- Failure To Conduct Reasonable Due Diligence
- Overconcentration
- Inadequate Supervision
- What Evidence Often Matters Most?
- How Does The Arbitration Process Usually Work?
- What Damages Are Usually Sought?
- Why Do Illiquidity And Valuation Create So Much Friction?
- What Role Do FINRA Rules And Reg BI Play?
- When Do Investors Realize They May Have A Claim?
- Why Attorney Selection Matters In These Cases
- Final Thoughts For Beginners
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Alternative Investment Claims: A Beginner’s Guide to Illiquid Securities Arbitration Cases
Alternative investments can sound sophisticated, steady, and income-focused. In real life, many investors first learn the hard part later: some of these products are difficult to value, difficult to sell, and difficult to unwind when things go wrong.
That is where arbitration often enters the picture.
If you invested in a non-traded REIT, a BDC, a private placement, or another illiquid security through a brokerage firm, and later discovered that the investment did not behave the way it was presented, a FINRA arbitration claim may become part of the conversation. In general terms, these cases often focus on whether the product matched the investor’s objectives, whether key risks were adequately disclosed, whether the firm performed a reasonable investigation, and whether the recommendation fit the customer’s liquidity needs, risk tolerance, age, and account profile.
In this post you’ll learn what illiquid securities are, why alternative-investment disputes often end up in arbitration instead of court, what legal theories frequently appear in these claims, what evidence tends to matter, and why these cases can look different from claims involving publicly traded stocks. For background on the products themselves, it may help to start with this overview of how non-traded REITs, BDCs, and other alternatives work.
Scroll to the bottom for every post in this series.
What Are Illiquid Securities?
An illiquid security is an investment that cannot be sold quickly in a ready public market at a transparent, continuously updated price. That broad category can include non-traded REITs, non-publicly traded BDCs, Regulation D private placements, equipment-leasing programs, certain oil and gas offerings, tenant-in-common interests, and other alternative products.
Federal investor guidance has long described non-traded REITs and private placements as illiquid, meaning investors generally cannot sell them readily on an exchange and may have to wait for limited repurchase windows, a listing event, liquidation, or some other uncertain exit path. The SEC’s Investor.gov materials also explain that privately offered and non-publicly traded BDCs can involve sporadic or delayed opportunities for sale, along with leverage, fees, and valuation complications (Investor.gov on non-traded REITs, Investor.gov on non-publicly traded BDCs, Investor.gov on private placements).
That lack of liquidity is not a side issue. In many customer disputes, it becomes the center of the claim.
Why Do These Cases Often Go To FINRA Arbitration?
Most disputes between retail customers and brokerage firms are handled in FINRA arbitration rather than in court. FINRA Rule 12200 provides that parties arbitrate under the Customer Code when arbitration is required by written agreement or requested by the customer, the dispute is between a customer and a member or associated person, and the dispute arises in connection with the member’s business activities (FINRA Rule 12200).
That matters because many brokerage account agreements include predispute arbitration clauses. FINRA also explains that its Dispute Resolution Services forum is the largest securities dispute resolution forum in the United States, and that a substantial share of customer cases resolve before a final hearing. FINRA states that approximately 69% of customer cases result in settlements reached by the parties (FINRA Resolution And Results For Customers).
As of FINRA’s 2025 year-end dispute statistics, customer case filings totaled 1,643, with overall turnaround time listed at 13.4 months, although actual timing can vary meaningfully based on complexity, discovery disputes, panel scheduling, and settlement activity (FINRA 2025 Dispute Resolution Statistics).
What Makes An Alternative Investment Claim Different From A Stock Claim?
A public-stock case often turns on a visible price decline, a trade confirmation, research, or concentrated exposure that can be tracked day by day. Illiquid securities claims often look different because the problems may stay hidden for longer.
With alternative investments, investors frequently do not see real-time market pricing. Account statements may carry sponsor-provided values, estimated net asset values, or stale prices that do not necessarily reflect what the investor could actually receive in a sale. In some cases, distributions can create an impression of stability even when the underlying investment is deteriorating. Investors may also discover that redemption programs are limited, suspended, or subject to heavy discounts.
That is one reason these matters can be harder to spot early. It is also one reason case development often requires a closer review of the original sales process, offering materials, account records, suitability information, and supervisory documentation. If you want a deeper comparison, it can help to read more about why illiquid products create different arbitration problems than ordinary stock cases.
What Kinds Of Investments Commonly Appear In These Cases?
The most common products in this area include:
Non-Traded REITs
Non-traded REITs invest in real estate-related assets but do not trade on an exchange. Investor.gov notes that they can involve substantial fees, limited liquidity, and valuation challenges. Some distributions may include return of capital rather than income generated from operations, which can affect how investors understand performance (Investor.gov on non-traded REITs).
Non-Publicly Traded BDCs
BDCs invest in smaller or developing businesses and often hold private, difficult-to-value assets. Investor.gov explains that non-publicly traded BDCs are illiquid and may provide only limited windows for sale or repurchase, sometimes years after the initial investment (Investor.gov on non-publicly traded BDCs).
Private Placements
Private placements sold under Regulation D often involve less public disclosure than exchange-traded investments. Investor.gov describes them as highly illiquid and warns that investors may be exposed to increased risk of loss, including total loss (Investor.gov on private placements).
Other Alternative Products
Other disputes may involve direct participation programs, oil and gas deals, equipment finance offerings, private funds, structured notes with limited liquidity, or bespoke income products. The themes often overlap: complexity, limited marketability, and uncertainty around value.
What Are Investors Usually Claiming In These Arbitrations?
Every case is fact-specific, but several theories appear again and again.
Unsuitable Or Poorly Matched Recommendations
FINRA has stated that when member firms recommend private placements, they have obligations under Regulation Best Interest for retail customers and under FINRA Rule 2111 for suitability in other contexts. FINRA’s guidance emphasizes the importance of a reasonable investigation and customer-specific analysis before recommending these products (FINRA Regulatory Notice 23-08, FINRA Private Placements Topic Page, FINRA Annual Oversight Report On Private Placements).
In plain terms, many arbitration claims argue that the investment did not fit the customer’s actual profile. A retiree seeking liquidity, capital preservation, or conservative income may later contend that an illiquid private product was inconsistent with those goals.
Misrepresentation Or Omission
Another frequent claim is that the product was described in a way that downplayed its risks. That can include alleged omissions or incomplete explanations about:
- illiquidity
- high commissions and offering costs
- redemption restrictions
- valuation uncertainty
- leverage
- speculative underlying holdings
- concentration risk
- conflicts of interest
- distribution sources
These cases often focus less on one dramatic false statement and more on the overall sales presentation.
Failure To Conduct Reasonable Due Diligence
FINRA has repeatedly highlighted that firms recommending private placements are expected to conduct a reasonable investigation of the securities they sell. In arbitration, claimants may argue that the firm relied too heavily on issuer materials, failed to vet the sponsor, overlooked red flags, or did not understand the investment well enough to recommend it responsibly (FINRA Regulatory Notice 23-08).
Overconcentration
Many claims involve not only the product itself, but how much of the investor’s portfolio went into illiquid alternatives. A single speculative product can be problematic. Multiple illiquid products across retirement accounts can be even more significant. In practice, concentration can amplify liquidity stress, especially when an investor later needs cash for living expenses, healthcare, taxes, or estate planning.
Inadequate Supervision
Claims against the brokerage firm often include allegations that supervisors failed to monitor sales practices, concentration levels, suitability red flags, or communications used to market alternative products. FINRA identifies supervision as one of the core obligations that applies in this space (FINRA Private Placements Topic Page).
What Evidence Often Matters Most?
In many illiquid securities cases, the evidence is less about a single trade ticket and more about the story the documents tell together.
Important materials often include:
- new account forms
- updates to investment objectives or risk tolerance
- notes from meetings and calls
- emails and text messages
- prospectuses or private placement memoranda
- marketing brochures and slide decks
- subscription agreements
- liquidity disclosures
- account statements over time
- internal due-diligence files
- supervisory reviews
- compensation records showing commissions or incentives
- records tied to redemptions, tender offers, or valuation changes
FINRA’s discovery rules and Discovery Guide are often central to how this evidence gets exchanged in the arbitration process (FINRA Discovery Overview).
From a practical standpoint, timing also matters. Some investors do not realize a problem exists until distributions stop, a valuation drops, a liquidity program changes, or the adviser later recommends holding despite mounting concerns. Those facts can affect when the claim crystallized and how damages are argued.
How Does The Arbitration Process Usually Work?
At a high level, a customer arbitration often begins with a Statement of Claim filed with FINRA. FINRA explains that the statement has no required format, but it generally sets out the facts, legal theories, and requested relief. After filing, the respondents answer, arbitrator selection begins, and the parties move into discovery, motion practice, mediation discussions, and potentially a final hearing (FINRA Investor’s Guide To Securities Industry Disputes, FINRA Arbitration And Mediation).
Some lower-dollar claims can proceed under simplified procedures. FINRA states that when the amount in dispute is $50,000 or less, excluding interest and expenses, no hearing is held unless the customer requests one under Rule 12800 (FINRA Simplified Arbitrations).
For more complex alternative-investment disputes, the process often involves broader document requests, industry witnesses, due-diligence arguments, and fact-intensive testimony about what was said at the point of sale.
What Damages Are Usually Sought?
Damages theories vary, and an attorney often helps evaluate which approach fits the product and the record.
Depending on the facts, claimants may seek:
- out-of-pocket losses
- rescissory damages or a rescission-style measure
- lost opportunity damages in limited contexts
- interest
- costs and fees where legally available
- expungement-related positions, if relevant on the other side
- equitable relief connected to the account or security
The damages model in an illiquid security case can be more complicated than in a stock-loss case because there may not be a clean market price. Valuation disputes, tender-offer prices, estimated NAVs, sponsor communications, and expert analysis can all influence the measure of loss.
Why Do Illiquidity And Valuation Create So Much Friction?
This is one of the most important issues for beginners to understand.
When a stock trades daily on a public exchange, everyone can usually see a current market price. When a non-traded REIT, private BDC, or private placement does not trade that way, investors may receive statement values that feel precise but are not equivalent to a ready market bid.
That gap can drive several disputes:
- whether the customer understood there was no reliable resale market
- whether statement values created a false sense of safety
- whether distributions masked deterioration
- whether the investment’s true risk profile was presented accurately
- whether the investor could realistically access cash when needed
This is also why many investors later start asking whether the product ever belonged in the account in the first place. A separate discussion of how to evaluate whether an illiquid investment fit the account at all can be useful when building that timeline.
What Role Do FINRA Rules And Reg BI Play?
FINRA’s current guidance is especially relevant in these cases because it ties the sales process to specific conduct obligations.
FINRA has said that broker-dealers recommending private offerings to retail customers are subject to Regulation Best Interest, and that firms recommending private placements have reasonable-investigation duties as well as customer-specific obligations. FINRA also points to related rules on communications with the public, supervision, and private securities transactions (FINRA Regulatory Notice 23-08, FINRA Reg BI Topic Page, FINRA Annual Oversight Report On Private Placements).
For investors, that often translates into a few practical questions:
- Did the adviser truly understand the product?
- Did the firm investigate the issuer and offering?
- Did the recommendation fit the customer’s profile?
- Were communications fair and balanced?
- Was the concentration level monitored?
- Were liquidity constraints clearly explained?
Those questions often shape both liability and settlement discussions.
When Do Investors Realize They May Have A Claim?
In many cases, not right away.
Some investors only begin asking questions when:
- distributions are reduced or suspended
- account values are revised downward
- a repurchase program changes
- they attempt to sell and learn there is little or no market
- they retire and discover the account is less accessible than expected
- a new adviser reviews the portfolio and flags concentration or product mismatch
That delayed recognition is common in illiquid-product cases because the warning signs can be less visible than a public stock collapse. If you are seeing those patterns, it may also help to read about some of the common errors that can slow down an investor recovery effort.
Why Attorney Selection Matters In These Cases
Illiquid securities arbitration is highly fact-specific. The product structure matters. The sales record matters. The investor profile matters. The account concentration matters. And because these claims often involve a mix of securities law concepts, FINRA procedure, product due diligence, and damages analysis, the lawyer’s relevant background can matter just as much as the general practice label.
Some investors start by looking for “a securities lawyer.” That is a broad category. In practice, many people want someone with documented experience handling FINRA claims involving non-traded REITs, BDCs, private placements, and other highly similar matters.
That distinction can be important because alternative-investment disputes are rarely one-size-fits-all. A lawyer familiar with publicly traded stock cases may not approach an illiquidity dispute the same way as someone who has worked through valuation, concentration, and sponsor-structure issues in comparable arbitrations.
ReferU.AI was built around that problem. Instead of relying on advertising, directories, or generic profiles, ReferU.AI matches users with attorneys based on demonstrable experience, objective criteria, and court-record-based evidence tied to similar matters. That can be especially useful when the legal issue involves a niche product category and a highly specific dispute path like FINRA arbitration.
Final Thoughts For Beginners
Alternative investments are often sold as portfolio diversifiers or income-producing opportunities. But when the product is illiquid, opaque, or difficult to value, the legal issues can become more complicated than many investors expect.
A beginner’s understanding of these cases starts with a few core ideas: illiquidity changes the risk profile, valuation can be less transparent than statement values suggest, sales-practice issues often sit at the heart of the dispute, and FINRA arbitration is the forum where many of these claims are resolved.
If you’re trying to sort out whether a non-traded REIT, BDC, private placement, or similar product was appropriately recommended, an attorney may help you evaluate the facts, the documents, the timing, and the available claims in a more structured way.
Visit ReferU.AI to get matched with an attorney who has demonstrable experience in cases like yours — for free.
