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FINRA 15-02 Goes into Effect

The Financial Industry Regulatory Authority Regulatory Notice 15-02 went into effect yesterday, and going forward, direct participation programs and non-traded real estate investment trusts are required to include per share estimated values on investor account statements on a more frequent basis.

The amendments, which modify National Association of Securities Dealers Rule 2340 and FINRA Rule 2310, are intended to increase transparency for shareholders.

According to FINRA, “the general industry practice is to use the offering price of DPP and REIT securities, typically $10 per share, as the per share estimated value during the offering period – which can continue as long as seven and a half years. The offering price often remains constant on customer account statements during this period even though various costs and fees have reduced investors’ principal and underlying assets may have decreased in value.”

Direct investment programs are now required to utilize either the net investment methodology or the appraised value methodology to determine the value of the shares.

The rules also require a shorter time period before a valuation is determined. For example, if a company uses the appraised value methodology, they will need to conduct valuations on an annual basis that are performed by or with a third-party valuation expert.

The FINRA amendments went into effect on the heels of the Department of Labor’s final fiduciary rule released last Wednesday, which requires those providing retirement investment advice to adhere to a more rigid fiduciary standard.

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