Proposed Rules Change Requires Firms to Issue Clearer Nontraded REIT Statements

Attorney Advising Disclaimer

FINRA proposed a rules change that, if approved by the SEC, will change the way broker-dealers list the price of nontraded real estate investment trusts (REITs), thereby increasing transparency for investors by effectively reducing REIT share prices on each customer account.

Securities and Exchange Commission Rule Filing SR-2014-006 (Rule 19b-4 of the Securities Exchange Act of 1934)

Present appraisal guidelines and procedures allow firms to engage in valuation practices listing the per-share value of nongraded REITs at (for instance) $10, which is a common price brokers sell REITs for. As suggested, the $10 offering price per share represents the sale price which includes a certain disclosed commission and other organization and offering expenses or fees.

If approved, the rules change would require firms to value the REIT at the amount available for investment, or $10 per share minus the percentage used for commissions plus the aforementioned expenses.

FINRA gives the example of a $10 per share REIT (under the current valuation framework), which is associated with a 10% selling commission and 2% organizational and offering expenses.

Under the new rule, the value of the share would drop 12% (10+2) to $8.80 per share since, after factoring in the various fees and expenses, $8.80 is the amount available for investment.

Alternatively, FINRA would allow independent valuation consisting of the most recent valuation which appears in the issuer's most current report and a determination by a third-party valuation expert, who would review the publication, REIT and expense projections to arrive at an amount available for investment, per share.

FINRA argues that the proposed rule change will "drastically" speed up the process that goes into seeing a valuation of less than $10 a share.

The rules change would apply to unlisted direct participation program (DPP) securities as well as REITs, and mandates several disclosures regarding DPP and REIT illiquidity and resale values.

If you have invested with a broker or firm whose opaque REIT valuation processes or misleading DPP sales practices have proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for investigation and consultation.

News: Finra seeks greater transparency in nongraded REIT statements (InvestmentNews)

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