Finra plan could upend illiquid investment reporting

SRO offers options on valuing vehicles like nontraded REITS on account statements.
MAY 28, 2013
Finra's board of governors has put in motion a plan that has the potential to drastically change how broker-dealers report the value of illiquid investments such as nontraded real estate investment trusts on client account statements. The Financial Industry Regulatory Authority Inc. has been working on revising rules about REIT and private-placement valuations on client account statements since September 2011, when it issued its first notice to members on the issue. It followed with another notice last March, with the goal of giving investors greater transparency regarding what their illiquid REITs and other investments are really worth. On April 19, Finra's board laid out two options for broker-dealers in its proposed changes to Rule 2340, which Finra plans to file with the Securities and Exchange Commission. In the first scenario, a broker-dealer simply would not be required to include a per-share estimated value of an unlisted private placement or REIT in a customer account statement. In a second, a broker-dealer could rely on a valuation if done by one of three methods: an independent, outside valuation service performed at least once every three years; a valuation handled by any service conducting valuations according to a methodology disclosed in the prospectus; or, for two years after first investing, a “net investment,” valuation that consisted of the offering price minus cash distributions to investors, and “organization and offering expenses” funded through borrowing or offering proceeds. Missing from the board of governor's meeting notes, however, is the specific language firms would have to use if choosing the first scenario, meaning if a firm did not include a per-share value on a client account statement. In a March notice to members, Finra stated that firms could mark a security as “not priced” if an appraised value had not been included in its second quarterly report. That “not priced” security could leave a confusing hole in client account statements. The board of governors meeting note does not mention the potential for listing the securities as “not priced,” but such language could be included in the rule filing itself. “I think we're well positioned for these potential changes,” said Nicholas Schorsch, CEO of REIT sponsor American Realty Capital, who added that greater disclosure and transparency were good for the nontraded REIT industry. Most nontraded REITs are sold at $10 per share and remain at that value on a client's account statement until 18 months after the REIT has stopped raising money — as required by Finra. That means that three, five or perhaps even seven years can pass before a client sees a valuation for a nontraded REIT other than $10 per share. REITs that raise money through an initial offering and then follow-on offerings have been called “zombie REITS” by some in the industry. When Finra initially issued the proposed rule change in September 2011, it favored subtracting expenses to create a value of a REIT. Kevin Hogan, chief executive officer of the IPA, said he could not comment on potential changes from the coming Finra proposal until he had read and studied it. The issue of how a nontraded REIT should be valued, and the obligation of a broker-dealer to note that valuation on clients' account statements, has been a contentious one in the years since the credit crisis. That's when some of the largest nontraded REITs suffered sharp declines in valuations quarter after quarter, after years of reporting a value of $10 per share, leaving investors and advisers struggling to understand how, why and to what degree the declines occurred.

Latest News

The 2025 InvestmentNews Awards Excellence Awardees revealed
The 2025 InvestmentNews Awards Excellence Awardees revealed

From outstanding individuals to innovative organizations, find out who made the final shortlist for top honors at the IN awards, now in its second year.

Top RIA Cresset warns of 'inevitable' recession amid tariff uncertainty
Top RIA Cresset warns of 'inevitable' recession amid tariff uncertainty

Cresset's Susie Cranston is expecting an economic recession, but says her $65 billion RIA sees "great opportunity" to keep investing in a down market.

Edward Jones joins the crowd to sell more alternative investments
Edward Jones joins the crowd to sell more alternative investments

“There’s a big pull to alternative investments right now because of volatility of the stock market,” Kevin Gannon, CEO of Robert A. Stanger & Co., said.

Record RIA M&A activity marks strong start to 2025
Record RIA M&A activity marks strong start to 2025

Sellers shift focus: It's not about succession anymore.

IB+ Data Hub offers strategic edge for U.S. wealth advisors and RIAs advising business clients
IB+ Data Hub offers strategic edge for U.S. wealth advisors and RIAs advising business clients

Platform being adopted by independent-minded advisors who see insurance as a core pillar of their business.

SPONSORED Compliance in real time: Technology's expanding role in RIA oversight

RIAs face rising regulatory pressure in 2025. Forward-looking firms are responding with embedded technology, not more paperwork.

SPONSORED Advisory firms confront crossroads amid historic wealth transfer

As inheritances are set to reshape client portfolios and next-gen heirs demand digital-first experiences, firms are retooling their wealth tech stacks and succession models in real time.