The Securities and Exchange Commission has approved a rule change proposed by Finra that will give investors greater insight into the costs of purchasing shares of unlisted real estate investment trusts.
The SEC gave the Financial Industry Regulatory Authority Inc.'s proposal the OK on Oct. 10.
Finra's proposed rule change would require broker-dealers to include a per-share estimated value for an unlisted direct participation program or a REIT on customer statements, as well as to make other related disclosures.
Such specificity with respect to the price of an unlisted REIT is a departure from firms' practices of listing nontraded REITs at a per-share price of $10.
“While the commission believes that this outcome would improve accuracy and transparency and, consequently, investor protection, it will continue to monitor the activity in this market for potential abuses,” wrote Kevin M. O'Neill, deputy secretary at the SEC, in the Oct. 10 memo.
Finra outlined two proposed methodologies that firms can use to calculate the per-share estimated value for a DPP or REIT: a net investment methodology or an appraised value methodology.
The net investment methodology would depict the “net investment” revealed in the issuer's most recent periodic report, according to the SEC's memo. The net investment would be based on the “amount available for investment” percentage shown in the offering prospectus. However, where “amount available for investment” isn't provided, the proposal would require that “net investment” be based on another equivalent disclosure that shows the estimated percentage deduction of commissions and other fees from the aggregate dollar amount of securities registered for sales.
Under the net investment methodology, broker-dealer firms also have to spell out to customers in a statement that part of their distribution includes a return of capital, and that “any distribution that represents a return of capital reduces the estimated per-share value shown on your account statement.”
With the second method — appraised value — Finra requires the share value be based on a valuation of the assets and liabilities of the DPP or REIT. Those valuations must be performed at least annually, be conducted by a third-party valuation expert and come from a methodology that conforms to standard industry practice.
Finra's proposal also calls for members to include specific disclosures stating that the DPP or REIT isn't listed on a national securities exchange, that it's generally illiquid and even if the client can sell the security, the price may be less than the estimated value given to them on their statement.
Finally, Finra also has proposed revisions to a rule focusing on prohibiting firms from participating in a public offering of a REIT or DPP unless the issuer has disclosed the per-share estimated value in a manner that's reliable based on the valuations of the assets and liabilities of the DPP or REIT. That valuation must be derived from a methodology that adheres to industry practice and the value must be disclosed in the periodic reports of the DPP or the REIT.
DPPs subject to the Investment Company Act of 1940 — namely, business development companies — have a carve-out, as their issuers are required to determine and publish the net asset value on a regular basis.