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NASAA Seeks Public Comment on Proposed Non-Traded REIT Policy Revisions

The North American Securities Administrators Association (NASAA), a non-profit association of state, provincial, and territorial securities regulators, seek public comment on proposed revisions to its non-traded REIT guidelines.

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The North American Securities Administrators Association (NASAA), a non-profit association of state, provincial, and territorial securities regulators, seek public comment on proposed revisions to its non-traded real estate investment trust guidelines.

The four primary revisions being proposed are:

  • Updating the conduct standards for brokers selling non-traded REITs, i.e., supplementing the suitability section with references to the Securities and Exchange Commission’s Regulation Best Interest conduct standard,
  • Updating the net income and net worth financial figures in the suitability section, i.e., adjusting upward to account for inflation occurring since last adjustment,
  • Adding a new standardized concentration limit to the suitability section,
  • Adding a new prohibition against using gross offering proceeds as an investment objective or strategy to make distributions.

Last revised in 2007, NASAA’s Statement of Policy Regarding Real Estate Investment Trusts applies to the qualifications and registrations of non-traded REITS.

The proposed revisions seek to update the conduct standards for brokers selling these products by supplementing the suitability section with references to the SEC’s best interest conduct standard.

The proposed revisions also includes an update to the net income and net worth requirements to account for inflation. The current figures, adopted in 2007, specify the combination of a minimum net income of $70,000 and minimum net worth of $70,000, or a minimum net worth of $250,000.

NASAA recommends that the requirements be adjusted to a minimum annual gross income of $95,000 and a minimum net worth of $95,000, or a minimum net worth of $340,000, according to its proposal, using the U.S. Bureau of Labor Statistics Consumer Price Index for All Urban Consumers as the basis for the adjustment.

“The REIT guidelines have not been updated for more than 15 years and these revisions are long overdue. If adopted, the proposed revisions will make key inflationary adjustments to existing suitability standards and promote uniformity in state concentration limits, both of which are key to limiting retail investor risk,” said Andrea Seidt, NASAA’s corporation finance section committee chair and Ohio securities commissioner.

In its third proposed revision, NASAA recommends adding a 10 percent concentration limit within its REIT guidelines. Specifically, “NASAA recommends a limitation prohibiting an aggregate investment in the issuer, its affiliates, and other non-traded direct participation programs that exceeds 10 percent of the purchaser’s liquid net worth,” the proposal states. Liquid net worth consists of cash, cash equivalents, and marketable securities.

NASAA noted that “multiple states” already have this standard, and others use the 10 percent threshold with similar language.

The fourth proposed revision includes a new prohibition against using gross offering proceeds to fund distributions, which NASAA believes may “confuse and mislead” investors about product performance and returns.

“As non-traded REITs are frequently sold and marketed to retail investors as ‘income-producing’ or ‘yield-producing’ assets, investors might not understand that this feature means that some of their money is not being invested in income-producing real estate, but rather is being used to pay distributions to investors,”  NASAA stated in its proposal. “In other words, some investors do not understand that the ‘income’ or ‘yield’ that they receive may be nothing more than a partial return of their own money.”

Comments can be submitted by email on or before August 11, 2022. All comments will be posted to NASAA’s website without edit or redaction.

Comments should be emailed to NASAAComments@nasaa.org, with a cc: to the section chair, Andrea Seidt (Andrea.Seidt@com.ohio.gov), and the project group chair, Mark Heuerman (Mark.Heuerman@com.ohio.gov).

NASAA’s membership consists of the securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, the 13 provinces and territories of Canada, and the country of Mexico. NASAA members are responsible for administering state and provincial securities laws.

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