Non-traded REITs have been getting a lot of bad press lately, as valuations for some have dropped dramatically. And now the industry is being looked at closely by regulators—including FINRA and the states—as to how broker/dealers and advisors are using non-traded REITs, and how fees and performance should be disclosed.
I recently spoke with Kevin Hogan, president and CEO of the Investment Program Association, who had seven regulators at his organization’s spring conference last month. He gave me a brief update on the regulatory environment for non-traded REITs. Comment letters on FINRA’s regulatory notice 12-14 were due April 11, and the agency is currently reviewing comments. The next step, Hogan said, is for FINRA to make a recommendation to the SEC, which he expects to occur in late summer, early fall.
If passed, the current proposal would shorten the amount of time REIT providers would have to share valuations. They’d also have to include the up-front fees and expenses in the initial offering price.
Late last year, FINRA released regulatory notice 11-44, which received a flood of comments. For the recent proposal, an amendment to 11-44, FINRA received half the comment letters, an indication that FINRA is moving in the right direction, Hogan said. “When that happens, they feel like they’re getting it more right.”
Hogan said the IPA is also collaborating with the North American Securities Administrators Association, the state organization, which may update its statement of policy regarding REITs. NASAA issued an informal solicitation for comments on whether it should revise its statement of policy for REITs and whether it should develop a statement of policy for Business Development Companies, BDCs. Those comments are due May 21.
NASAA is asking whether it should make changes to certain provisions, including suitability and concentration standards, provisions on net asset value, provisions on non-GAAP financial measures, and gross offering proceeds as a source to fund distributions. The last update was made in May 2007.
Despite the bad press and the concern out there in the marketplace, Hogan said first quarter capital raise for REITs was up 30 percent from last year, and he believes it will continue to be a productive year for the industry.
“There is an incredible amount of transition that will positively impact the future of this industry,” Hogan said. “New product innovation, standards for valuation and statement pricing are going to influence how Direct Investments will be embraced by financial advisors.”
I still just wonder if this is the next shoe to drop…