Fri, Oct 24, 2014

SEC Valuation Rule Changes for Non-Listed REITS

Earlier this year, FINRA filed SR-FINRA-2014-006 with the SEC to amend provisions addressing per share estimated valuations for unlisted REITs. The SEC then instituted proceedings to approve or reject the rule change with an expedited comment period. Based upon the comments received, FINRA amended the submission and submitted a revision to the SEC. The rule post amendment (NASD Rule 2340-Customer Account Statements) was approved by the SEC on October 10, 2014.

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

  • At a minimum firms must disclose that: (1) there is no liquid market for the interests,(2) value may not reflect a value at which customers can liquidate their positions,(3) what the methodology was to arrive at value reported, and (4) that value reported was based upon reliable methodology
  • 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 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.
  • This rule will go into place 18 months from the approval date of 10-10-2014.

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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