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FINRA Listens, Asks SEC to Grant 18 Month Adjustment Period

In a welcomed move, FINRA has asked the SEC to allow independent broker-dealers and sponsors of non-traded REITs and direct participation programs (DPPs) 18 months to adjust to amendments to NASD Rule 2340, the customer account statements rule. Earlier proposals suggested six months would be appropriate. 

Matthew E. Vitek, Associate General Counsel for FINRA, sent a letter this past Friday, July 11th, to the SEC in response to comments filed with the Commission regarding the proposal, often called FINRA 14-06.

The proposed changes would modify how companies state the values of DPPs and non-traded REITs on customer account statements.

Currently, public DPP and non-traded REIT sponsors may issue an offering at a selected price, which could be $10 per share, then use that figure as its per share valuation during the offering period, which may last up to three years and could be extended up to another three years. Critics point out that this method does not take into account the initial sales load or distributions made during the offering period. 

For example, if an investor purchases a non-traded REIT at $10 per share and pays a 12% front end load, only $8.80 per share is initially available for investment, but sponsors are able to continue and state the value at $10 per share.

The industry and FINRA agree that change is a good thing, if done with care. Most embrace the idea of transparency.

“Commenters generally supported FINRA’s efforts to provide greater transparency and enhance investor protection for DPP’s and REITs,” said Vitek in his letter to the SEC.

One area of concern has been FINRA’s proposal to include “over distributions” when calculating net investment. “The primary concern with “over distributions” comes from investor confusion over whether a distribution constitutes income or return of capital,” according to Vitek’s letter.

As a result, FINRA amended its proposal to exclude this and include enhanced disclosure for DPPs or REITs that choose the net investment methodology to include the following language if applicable:

“IMPORTANT – Part of your distribution includes a return of capital. Any distribution that represents a return of capital reduces the estimated per share value shown on your account statement.”

As for the timing of when a per share estimated value must be updated on customer statements, FINRA has amended its original proposal which was to include the values in the first report filed after the second anniversary of breaking escrow. Very similar to the IPA’s REIT Valuation Guideline, FINRA has now proposed disclosure within 150 days following the second anniversary of breaking escrow.

All eyes will be on the SEC as they consider Vitek and FINRA’s most recent comments and amended proposal.