Finra is continuing to tack on time to the widely anticipated rule change that would give investors a clearer picture of what it costs to buy shares of nontraded real estate investment trusts and other direct placement programs, an industry term widely used for private placements.
The Financial Industry Regulatory Authority Inc. on Wednesday extended until October 17 the time the Securities and Exchange Commission has to act on a proposed change to rule 2340, or rules affecting customer account statements. Industry executives, who publicly praised Finra and the SEC for their work on the rule change, had widely anticipated the commission to vote on the revamped client account statement rule by September.
It is the second time this year Finra extended the SEC's time for the commission to consider the client account rule changes. In March, Finra extended the SEC's time until May.
Finra also has asked the SEC to give the industry more time to make the changes. In July, Finra asked the SEC to give independent broker-dealers and nontraded REIT sponsors 18 months to adjust to the new guidelines. Originally, it had proposed six months.
If the commission follows Finra's guidance, investors who own nontraded REITs and other illiquid investments wouldn't see the changes in their account statements until April 2016. Finra originally floated the potential for the rule change in September 2011.
The nontraded REIT industry has grown substantially recently and is on track in 2014 to see about $20 billion in sales. That would be about the same as 2013, which was double the amount of 2012.
The drawn out rule making process is irksome to some financial advisers.
“It would be nice to get some finality and clarity on the new rules on valuing DPPs,” said Larry Solomon, director of investments and financial planning for OptiFour Integrated Wealth Management, a registered investment adviser with $241.8 million in assets under management. “We think this rule will materially impact the way we report performance and advise our clients on their nontraded investments, but still don't have any of the specifics yet on when and how.”
Finra spokeswoman Michelle Ong said the regulator had no comment for this story.
The proposed rule change affecting broker-dealer client account statements would do away with the current practice of listing the per-share value of a nontraded REIT at $10, the common price at which registered reps sell them to clients.
Instead, Finra's requested 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 or private placement on a customer's account statement.
Nontraded REITs now don't have to show an estimated per-share valuation until 18 months after the sponsors stop raising funds, which in many cases can take two to three years. The Finra proposal speeds up the process to as little as three to six months for when investors would see a valuation of less than $10 per share.
Commissions to reps and broker-dealers, along with organizational and offering expenses, can cost investors up to 12% of their original investment. That would bring the estimated value of a REIT sold at $10 down to $8.80 per share.
