Finra is putting the finishing touches on a rule proposal that would shorten the amount of time available to broker-dealers to come up with estimated valuation of a nontraded REIT
Finra is putting the finishing touches on a rule proposal that would shorten the amount of time available to broker-dealers to come up with estimated valuation of a nontraded REIT.
The Financial Industry Regulatory Authority Inc. has been zeroing in on the issue in the recent past. In May, the regulator filed a complaint against David Lerner Associates Inc., claiming that the longtime $11- a-share value of Lerner's Apple real estate investment trusts was unreasonable in the face of market fluctuations and other events.
And in 2009, Finra issued a notice to members that reminded them of their obligation to list an estimated value on client account statements 18 months after the offering is closed to new investors, rather than list the price or par value at which it was sold to investors.
However, broker-dealers have a lengthy grace period during which nontraded REITs can remain at par before an estimated market value is established. Par value for most nontraded REITs is $10 a share, and a typical offering period is two years.
That $10-a-share value is listed on client account statements for those two years.
But REIT sponsors commonly extend the offering period to sell more shares to investors, pushing the deadline for an updated market valuation. Given the initial 18-month grace period, four or five years can pass before a nontraded REIT has to be given a market valuation, industry observers said.
NARROWING GAPS
The Finra rule proposal would shorten that time period considerably, said Kevin Hogan, executive director of The Investment Program Association, a trade group for alternative-investment sponsors, including nontraded REITs and the broker-dealers that sell them. This month, the IPA held a members-only webinar with Finra and Securities and Exchange Commission officials, who discussed the rule proposal.
Finra's proposal will be followed by the customary period of time for broker-dealers and industry sponsors to comment, Mr. Hogan said. But Finra's focus on the length of time that elapses before an estimated valuation must be recorded for nontraded REITs is clear, he said.
“Finra will try to have that date to be shorter and more definitive,” Mr. Hogan said.
Nancy Condon, a spokeswoman for Finra, said she doesn't know when Finra will publish the rule proposal for comment.
It appears that regulators' concern about the valuation of illiquid nontraded REITs stemmed from the valuation of the Apple REITs, which are sold exclusively by David Lerner Associates brokers, Mr. Hogan said.
Finra's complaint against David Lerner Associates alleged that since at least 2004, the closed Apple REITs have “unreasonably valued their shares at a constant price of $11, notwithstanding market fluctuations, performance declines and increased leverage.”
The complaint also alleged that the REITs maintained “outsized distributions of 7% to 8% by leveraging the REITs through borrowings and returning capital to investors. As sole distributor, [David Lerner Associates] did not question the Apple REITs' unchanging valuations despite the economic downturn for commercial real estate.”
Jessica Pochylski, a spokeswoman for David Lerner Associates, declined to comment.
Email Bruce Kelly at bkelly@investmentnews.com
