SEC Valuation Rule Changes for Non-Listed REITS

The SEC approved amendments to NASD Rule 2340 (Customer Account Statements) to modify the requirements relating to the inclusion of per share estimated values for the direct participation program (DPP) and unlisted real estate investment trust (REIT) securities on account statements. Corresponding changes were also made to FINRA Rule 2310 (Direct Participation Programs) to the requirements applicable to members’ participation in public offerings of DPP or REIT securities. The amendments become effective on April 11, 2016.

Salient rule changes that will affect disclosure and practice are as follows:

  • FINRA proposes two methodologies under which reported values are to be presumed reliable and included on customer account statements: (1) Net Investment, and (2) Independent Valuation.
  • Net Investment may be used no longer than two years plus 150 days after breaking escrow. Net Investment is defined as the gross operating share price less selling commissions and organizational offering expenses. An over distribution deduction is not to be included in the Net Investment methodology.
  • Independent Valuation methodology requires that a third-party, independent valuation expert perform or provide material assistance in the valuation beginning at a minimum of two years plus 150 days after breaking escrow. It is also required that the valuation be updated annually thereafter. This amendment also refers to the Investment Program Association approved valuation methodology that is recommended for sponsors.
  • The Independent Valuation must be accompanied by a written opinion or report by the issuer delivered annually to the broker-dealer that explains the scope of the review, the methodology used and the basis for the values reported.

As the world’s largest independent valuation firm, Duff & Phelps has the objectivity and expertise necessary to ensure transparency. Please contact us for further clarity or to discuss your firm’s particular needs.

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