Finra holds off sending nontraded REIT share price rule to SEC

Regulator still reviewing industry comments on rule to give investors better handle on share values

May 20, 2014 @ 2:24 pm

By Bruce Kelly

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Finra is delaying sending proposed new rules to the Securities and Exchange Commission that would give investors a clearer picture of what it costs to buy shares of a nontraded real estate investment trust.

The Financial Industry Regulatory Authority Inc. in February proposed the rule changes, which, if approved by the SEC, would do away with the practice of broker-dealers listing the per-share value of a nontraded REIT at $10, the common price at which registered reps sell them to clients.

Finra's potential rule change would take into consideration the various fees and commissions paid to brokers and dealer managers, reducing the share price for each nontraded REIT on a customer's account statement. The potential rule change, which Finra initially made in September 2011, also applies to unlisted private placements.

The comment period on the proposed rule changes ended in mid-March. Last Friday, Finra's assistant general counsel Matthew Vitek told the SEC in a letter that Finra was “still considering comments” to the rule filing but “anticipates submitting a response to comments and amendments to the above reference rule filing in the near future.”

Finra spokeswoman Michelle Ong had no comment.

John McInerney, a spokesman for a nontraded REIT trade group, the Investment Program Association, said that the organization “doesn't have any insight to share about the regulatory process at this time.”

The IPA in March submitted a comment letter to the SEC that would put off till the end of 2015 making changes to how REIT valuations appear on client account statements. The IPA in its letter asked for more time to give nontraded REIT sponsors and broker-dealers that sell the products to adjust.

Finra's proposed rule changes come as sales of nontraded REITs have increased dramatically, reaching close to $20 billion in 2013, double the amount sold in 2012.

Finra's proposal affects independent broker-dealers and their affiliated reps because those firms and reps almost exclusively sell nontraded REITs.

The specific rule that Finra is proposing to change is NASD Rule 2340, regarding customer account statements.

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