DOL fiduciary rule a big win for nontraded REITs

Executives in the $10-billion-a-year nontraded real estate investment trust industry likely were doing handstands Wednesday morning after the Department of Labor released its streamlined final version of a regulation that would raise investment advice standards for retirement accounts.
In the DOL’s initial proposal in April 2015, it named certain asset classes that could be included in retirement accounts. Nontraded REITS were not on the list, effectively precluding brokers from using them in individual retirement accounts. Brokers have long sold nontraded REITs to retirees as a way for clients to create an income stream, which was much needed in recent years as interest rates hovered near zero.
In the final version of the fiduciary rule, the DOL has eliminated its list of asset classes, opening the door for nontraded REITS to continue to be placed in those accounts.
Indeed, nontraded REITs were mentioned specifically in the White House fact sheet on the final DOL rule: “Commenters asked the department to expand the proposed exemption to apply to products not listed in the exemption (such as listed options and nontraded REITs), and to permit recommendations to sponsors of participant directed plans like 401(k)s.”
Sales of nontraded REITs are allowed under the “best interest contract” exemption. “Advisers recommending any asset – not just those on an asset list included in the proposal – can take advantage of the [best interest contract] exemption to continue receiving most common forms of compensation,” according to the White House fact sheet.
In a chart showing the differences between the DOL’s 2015 fiduciary rule proposal and the final rule, the DOL made this distinction clear. Under the heading, “What critics said about the proposal,” it said, “By listing only certain asset classes to be covered by the BICE, the proposal limits investor choice.” Under the heading “What the DOL did in the final,” it stated, “The department has eliminated the list so that advice to invest in all asset classes is covered by the BICE.”
Sales of nontraded REITs, a high-commission product that typically pays brokers a 7% sales commission, slumped by almost 33% in 2015 compared with a year earlier.
Now, 2016 could wind up being a better year for nontraded REITs.
Executives in the nontraded REIT industry were not about to declare a full-blown victory Wednesday morning, as the White House had issued only a truncated fact sheet and the final rule was not to be published until close to noon. But they clearly liked what they saw.
“We are certainly pleased that the DOL incorporated input from a variety of sources in order to put forth a rule they believe is workable,” said Mark Goldberg, president of investment management for W.P. Carey Inc., a listed REIT that also manages and sponsors nontraded REITs. “Most importantly, from our perspective, it’s a rule that incorporates choices of various asset classes for use in the BIC exemption.”
“It is a very positive day for the [Investment Program Association] and its members,” said Anthony Chereso, the CEO and president of the IPA, a trade group for the direct investment industry, which includes nontraded REITs, nontraded business development companies and private placements. “We put forth a strong argument and our position was well-represented by a coalition of members. The IPA’s initial ask of removal of the [asset class] list was accommodated, based on the preliminary information. Essentially, it’s asset neutral.”
“Our assessment all along was that there was a 50-50 chance that the industry would get relief from the earlier proposal,” said Kevin Gannon, president and managing director of Robert A. Stanger & Co. Inc., an investment bank that focuses on nontraded REITs. “It’s a good outcome all around for the space. The DOL didn’t exclude nontraded REITs. We think that’s good and rational.”

(Corrects earlier version of the story to say that the DOL’s initial proposal was in April 2015, not February.)