Under pressure from the SEC, Finra has amended its controversial non-traded REIT pricing proposal.
In an amendment filed Friday with the Securities and Exchange Commission, Finra would now mandate disclosure of estimated values of illiquid REITs and direct-participation programs on customer statements. In an earlier version of the rule, providing a value would have been voluntary, and if valuations were not provided, the securities could have been shown as “not priced.”
“After analyzing the comments, Finra agrees that showing securities on account statements as 'not priced' may be confusing to investors and does not fully promote transparency,” Finra said in a letter to the SEC Friday.
Under current rules, clearing firms and self-clearing broker-dealers must show the per-share values of unlisted DPPs and REITs when a security’s annual report includes a value, or alternatively, uses a figure from an independent valuation service.
Industry practice has been to use values from annual reports. But during the offering period, which can last as long as 7.5 years, annual reports from sponsors typically show the $10 per share offering price.
Regulators and other observers have said this practice can mislead investors about the true value of their assets.
The latest change to the Finra proposal comes after the SEC asked for additional comment on the plan in May. Several industry groups, including the Securities Industry and Financial Markets Association, the Financial Services Institute and the Public Investors Arbitration Bar Association, reiterated objections to the proposal. Finra filed its amendment last week in response.
Under the revision, estimated values of illiquid securities would have to be provided annually, rather than once every two years, beginning within 150 days after the second anniversary of breaking escrow. Product sponsors would have to calculate per-share values using one of two methodologies: either a net investment amount based on the proceeds available after offering costs or an appraised amount calculated with the assistance, or confirmed by, an independent third party.
These values would be presumed to be “reasonable” under Finra rules, eliminating concern about potential liability that brokerage firms had with the prior proposal.
Finra’s amendment would also exempt DPPs that are subject to the Investment Company Act of 1940.