[Federal Register Volume 79, Number 33 (Wednesday, February 19, 2014)]
[Notices]
[Pages 9535-9541]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-03573]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71545; File No. SR-FINRA-2014-006]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to 
per Share Estimated Valuations for Unlisted DPP and REIT Securities

February 12, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 31, 2014, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')) filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend the provisions addressing per share 
estimated valuations for unlisted direct participation program 
(``DPP'') and real estate investment trust (``REIT'') securities. The 
text of the proposed rule change is available on FINRA's Web site at 
http://www.finra.org, at the principal office of FINRA and at the 
Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    FINRA proposes to amend (1) NASD Rule 2340 (Customer Account 
Statements) to modify the requirements relating to the inclusion of a 
per share estimated value for unlisted DPP and REIT securities on a 
customer account statement; and (2) FINRA Rule 2310 (Direct 
Participation Programs) to modify the requirements applicable to 
members' participation in a public offering of DPP or REIT securities.
Proposed Amendments to NASD Rule 2340 (Customer Account Statements)
    NASD Rule 2340 generally requires that general securities members 
\3\

[[Page 9536]]

provide periodic account statements to customers, on at least a 
quarterly basis, containing a description of any securities positions, 
money balances or account activity since the last statement. Paragraph 
(c) addresses the inclusion of per share estimated values for unlisted 
DPP or REIT securities held in customer accounts or included on 
customer account statements. The rule also provides for several 
disclosures regarding the illiquidity and resale value of unlisted DPPs 
and REITs.
---------------------------------------------------------------------------

    \3\ NASD Rule 2340(d)(2) defines ``general securities member'' 
as any member that conducts a general securities business and is 
required to calculate its net capital pursuant to the provisions of 
Rule 15c3-1(a) under the Act. A member that does not carry customer 
accounts and does not hold customer funds or securities is exempt 
from the definition.
---------------------------------------------------------------------------

    FINRA (then NASD) adopted these requirements \4\ in part to respond 
to concerns expressed by the Commission's Division of Trading and 
Markets (then Division of Market Regulation) (``Division'') regarding 
the sufficiency of information provided on customer account statements 
with respect to the current value of illiquid partnership 
securities.\5\ To address these concerns, the Division suggested that 
FINRA adopt a rule requiring members to, at a minimum, disclose: (1) 
There is no liquid market for most limited partnership interests; (2) 
that the value of a partnership, if any, reported on the account 
statement may not reflect a value at which customers can liquidate 
their positions; and (3) the source of any reported value and a short 
description of the methodology used to determine the value and the date 
the value was last determined. FINRA, therefore, developed the 
provisions found in paragraph (c) of NASD Rule 2340, which have not 
been amended since original adoption in 2000.\6\
---------------------------------------------------------------------------

    \4\ See Exchange Act Release No. 43601 (Nov. 21, 2000), 65 FR 
71169 (Nov. 29, 2000) (Order Approving File No. SR-NASD-2000-13) 
(``Original Approval Order'').
    \5\ See Letter from Brandon Becker, Director, Division of Market 
Regulation, SEC, to Richard G. Ketchum, Executive Vice President and 
Chief Operating Officer, NASD, dated June 14, 1994.
    \6\ See Original Approval Order supra note 4.
---------------------------------------------------------------------------

    NASD Rule 2340(c) also addresses the sources that may be used in 
developing the per share estimated value included on a customer account 
statement. When an unlisted DPP or REIT security's annual report 
includes a per share estimated value, the general securities member 
must include the estimated value from the annual report in the customer 
account statement or an estimated value from an independent valuation 
service or any other source, in the first account statement issued by 
the general securities member thereafter.\7\ However, the customer 
account statement may not be left blank when an estimated value is 
included on an annual report.
---------------------------------------------------------------------------

    \7\ Notwithstanding this requirement, the rule provides that a 
general securities member must refrain from providing an estimated 
value for a DPP or REIT security on a customer account statement if 
the general securities member can demonstrate that the estimated 
value is inaccurate as of the date of the valuation or is no longer 
accurate as a result of a material change in the operations or 
assets of the program or trust. See NASD Rule 2340(c)(4). In 
addition, the estimated value must have been developed from data 
that are no more than 18 months old at the time the statement is 
issued. See NASD Rule 2340(c)(1)(B)(2).
---------------------------------------------------------------------------

    While the rule permits the use of estimated values from sources 
other than the annual report, it has become industry practice to 
include the annual report's per share estimated value. During the 
offering period, the annual report typically reflects the security's 
gross offering price (e.g., $10.00/share par value). A per share 
estimated value that reflects the gross offering price does not take 
into account organization and offering expenses or cash distributions 
that occur during the offering period. An initial offering period can 
last for three years and may be extended.\8\ Customer account 
statements thus may reflect the gross offering price for up to seven 
and a half years.\9\
---------------------------------------------------------------------------

    \8\ Rule 415(a)(5) under the Securities Act of 1933 
(``Securities Act'') provides that certain types of securities 
offerings, including continuous offerings of DPPs and REITs, may 
continue for no more than three years from the initial effective 
date of the registration statement. Under Rule 415(a)(6), the SEC 
may declare another registration statement for a DPP or REIT 
effective such that an offering can continue for another three-year 
offering period.
    \9\ Because NASD Rule 2340(c) permits the use of an estimated 
value developed from data that are no more than 18 months old, the 
estimated value from the annual report may be used until up to a 
year and a half from the conclusion of the offering.
---------------------------------------------------------------------------

    FINRA proposes to eliminate the requirement in NASD Rule 2340(c) 
that general securities members, at a minimum, include the per share 
estimated value that is reflected on a DPP or REIT security's annual 
report. Under the proposal, a general securities member would not be 
required to include in a customer account statement a per share 
estimated value for an unlisted DPP or REIT security, but any member 
(not only a general securities member) may choose to do so if the value 
has been developed in a manner reasonably designed to ensure that it is 
reliable, the member has no reason to believe that it is 
unreliable,\10\ and the account statement includes certain disclosures. 
FINRA proposes two methodologies under which an estimated value would 
be presumed reliable: (1) Net investment; and (2) independent 
valuation.
---------------------------------------------------------------------------

    \10\ FINRA would not consider a last sale price of an unlisted 
REIT or DPP in the secondary market, by itself, to constitute a 
reason to believe that an estimate derived by one of the 
methodologies set forth in this proposal is unreliable because these 
transactions often are infrequent and the illiquid nature of the 
secondary market may result in large discounts from independent 
valuation prices.
---------------------------------------------------------------------------

    The net investment methodology, which may be used for up to two 
years following the breaking of escrow,\11\ would reflect the ``net 
investment'' disclosed in the issuer's most recent periodic or current 
report (``Issuer Report''). ``Net investment'' must be based on the 
``amount available for investment'' percentage in the ``Estimated Use 
of Proceeds'' section of the offering prospectus or, where ``amount 
available for investment'' is not provided, another equivalent 
disclosure.\12\ For example, if the prospectus for an offering with a 
$10 offering price per share disclosed selling commissions totaling 10% 
of the offering proceeds and organizational and offering expenses of 
2%, the amount available for investment would be 88%, or $8.80 per 
share.
---------------------------------------------------------------------------

    \11\ Generally, offering proceeds are placed in escrow until the 
minimum conditions of the offering are met, at which time the issuer 
is permitted to access the offering proceeds.
    \12\ This disclosure is typically included in the prospectus for 
REIT offerings and is described in the SEC's Securities Act Industry 
Guide 5 (Preparation of registration statements relating to 
interests in real estate limited partnerships). FINRA would permit 
the use of equivalent disclosure in DPP offerings if the disclosure 
provides a percentage amount available for investment by the issuer 
after deduction of organizational and offering expenses.
---------------------------------------------------------------------------

    The per share estimated value also must deduct the portion, if any, 
of cumulative distributions per share that exceeded Generally Accepted 
Accounting Principles (``GAAP'') net income per share for the 
corresponding period, after adding back depreciation and amortization 
or depletion expenses. This provision recognizes that depreciation, 
amortization and depletion expenses reduce net income per share, but 
are not expenditures and do not impact the issuer's cash reserves. In 
addition, the deduction for each distribution would be limited to the 
full amount of the distribution. Therefore, even if net income, which 
may be negative during the two years following the breaking of escrow, 
with depreciation and amortization or depletion expenses added back in 
equals a negative number, the required deduction from the net 
investment amount would be limited to the amount of the distribution 
(rather than being further reduced by the amount of any negative net 
income).
    The independent valuation methodology, which may be used at any 
time, would consist of the most recent valuation disclosed in the 
issuer's periodic or current reports. The independent valuation 
methodology

[[Page 9537]]

requires that a third-party valuation expert or experts determine, or 
provide material assistance in the process of determining, the 
valuation.\13\
---------------------------------------------------------------------------

    \13\ Valuation definitions and methodologies for real estate 
investments generally use GAAP (ASC 820) as a standard. Performance 
reporting for institutional real estate investments also relies on 
GAAP as its foundational basis. See Investment Program Association 
Practice Guidelines 2013-01, entitled ``Valuations of Publicly 
Registered Non-Listed REITs'' (``IPA Guidance'') (Apr. 29, 2013).
---------------------------------------------------------------------------

    Consistent with the recommendations of the Division prior to the 
original adoption of paragraph (c), FINRA proposes to retain disclosure 
requirements relating to the nature and liquidity of DPP and REIT 
products in customer account statements. Under the proposal, when a 
customer account statement includes a per share estimated value for an 
unlisted DPP or REIT security, the statement must: (1) Briefly describe 
the per share estimated value, its source and an explanation of the 
method by which such per share estimated value was developed; and (2) 
disclose that the DPP or REIT securities are not listed on a national 
securities exchange, are generally illiquid and that, even if a 
customer is able to sell the securities, the price received may be less 
than the per share estimated value provided in the statement.
    When a member refrains from including a per share estimated value 
in a customer account statement for an unlisted DPP or REIT security, 
the statement nonetheless must disclose that: (1) Unlisted DPP and REIT 
securities are generally illiquid; (2) the current value of the 
security will be different than its purchase price and may be less than 
the purchase price; and (3) if applicable, an estimated per share value 
of the security currently is not available.\14\
---------------------------------------------------------------------------

    \14\ FINRA also is proposing to amend the definitions of DPP and 
REIT in Rule 2340(d) to cover such securities if they are ``on 
deposit in a registered securities depository and settled regular 
way.'' FINRA does not believe that the treatment of account 
statement disclosures for unlisted DPP or REIT securities should be 
different based upon where they are held on deposit or their 
settlement cycle.
---------------------------------------------------------------------------

Proposed Amendments to Rule 2310 (Direct Participation Programs)
    FINRA Rule 2310(b)(5) (Valuation for Customer Account Statements) 
generally provides that no member is permitted to participate in a 
public offering of DPP or REIT securities unless the general partner or 
sponsor will disclose in each annual report distributed to investors 
pursuant to Section 13(a) of the Act: (1) A per share estimated value 
of the securities; (2) the method by which such estimated value was 
developed; and (3) the date of the data used to develop the estimated 
value.
    FINRA proposes to amend this provision to provide that a member may 
not participate in a public offering of a DPP or REIT security unless: 
(A) A per share estimated value is calculated on a periodic basis in 
accordance with a methodology disclosed in the prospectus, or (B) the 
general partner or sponsor has agreed to disclose in the first periodic 
report filed pursuant to Sections 13(a) or 15(d) of the Act after the 
second anniversary of breaking escrow: (1) A per share estimated value 
of the DPP or REIT calculated by, or with the material assistance of, a 
third-party valuation expert;\15\ (2) an explanation of the method by 
which the per share estimated value was developed; (3) the date of the 
valuation; and (4) the identity of the third-party valuation expert 
used. In addition, the general partner or sponsor of the program or 
REIT must have agreed to ensure that the valuation is conducted at 
least once every two years; is derived from a methodology that conforms 
to standard industry practice; and is accompanied by a written opinion 
to the general partner or sponsor of the program or REIT that explains 
the scope of the review, the methodology used to develop the valuation, 
and the basis for the per share estimated value.
---------------------------------------------------------------------------

    \15\ The issuer further must agree to ensure that such valuation 
is conducted at least once every two years, is derived from a 
methodology that conforms with standard industry practice, and is 
accompanied by a written opinion to the general partner or sponsor 
of the program or REIT that explains the scope of the review, the 
methodology used to develop the valuation and the basis for the per 
share estimated value.
---------------------------------------------------------------------------

Industry Consultation and Alternatives Considered
    The proposal is intended to protect the investing public by seeking 
to ensure that any per share estimated value for an unlisted DPP or 
REIT security included on a customer's account statement is developed 
in a manner reasonably designed to ensure that it is reliable. In 
developing this proposed rule change, FINRA consulted extensively with 
members and other industry participants, including concerning the 
issues relevant to the various alternative approaches that were 
considered. These commenters expressed a variety of opinions concerning 
what type of valuation should be provided to customers. Specifically, 
FINRA requested public comment in two Regulatory Notices \16\ and met 
with industry participants, including independent broker-dealers; 
broker-dealers affiliated with sponsors that act as wholesalers; 
broker-dealers that specialize in advising boards of directors and 
general partners; DPP general partners and executives of REITs; 
clearing firms; and trade association representatives. The comments 
received in response to the Regulatory Notices are summarized here and 
discussed in detail in Item II. C. below.
---------------------------------------------------------------------------

    \16\ See Regulatory Notice 11-44 (Sept. 2011) (``Notice 11-44'') 
and Regulatory Notice 12-14 (Mar. 2012) (``Notice 12-14'').
---------------------------------------------------------------------------

    For example, some commenters to Notice 11-44 favored the use of the 
gross offering price, while others preferred the use of a net offering 
price. In Notice 11-44, FINRA proposed to require general securities 
members that hold DPP or REIT securities in customer accounts to 
provide a per share estimated value of the security on the account 
statement only if it appeared in the most recent annual report of the 
DPP or REIT. Notice 11-44 proposed to prescribe the valuations that 
could be presented. As a practical matter, the proposal in Notice 11-44 
would have required every customer account statement to present the 
prescribed per share estimated value unless the member had reason to 
know that it was unreliable.
    FINRA considered requiring that every customer account statement 
provided by a general securities member present a valuation of DPP and 
REIT securities. Requiring a valuation could provide a level of 
transparency concerning the value of those securities and the effect of 
brokerage commissions and other expenses. However, inclusion of a value 
on customer account statements for unlisted DPPs and REITs is 
beneficial to investors only if the valuation is reliable. As further 
discussed below, FINRA has determined not to explicitly require the 
presentation of a valuation in customer account statements because it 
could interfere with the objective of ensuring that valuations are 
reliable.
    FINRA believes that a preferable approach is to require that any 
valuation that is included in a customer account statement has been 
developed in a manner reasonably designed to ensure that it is 
reliable, and to prohibit a member from including any valuation that it 
has reason to believe is unreliable. This approach directly addresses 
FINRA's concern, which is that members currently are presenting an 
unreliable valuation (such as the gross offering price) in customer 
account statements--while also providing members with two possible 
methodologies that FINRA believe would result in more informative 
disclosure to investors. Under the

[[Page 9538]]

proposal, a methodology developed in a manner reasonably designed to 
help ensure that it is reliable may be used (unless the member has 
reason to believe that the valuation is unreliable).
    While the proposal would permit a member to develop its own 
methodology, FINRA expects that, in almost all cases, members would 
rely on the methodologies suggested by the proposal, both of which 
would be derived by the program sponsor. Currently, Rule 2340 permits 
members to present a valuation from an independent valuation service or 
some other source. When the provision was adopted in 2000, it was 
unclear whether members would rely on the valuation stated in the 
annual report, calculate their own valuation, or utilize a valuation 
service. Experience with the rule since its original adoption has shown 
that the consistent industry practice is to present the value in the 
program's annual report. If the proposal were adopted, FINRA believes 
that members would continue to present the valuation in the program's 
periodic reports.
    Nevertheless, optionality is necessary to ensure that the valuation 
is reliable. The proposal would prohibit a member from presenting a 
valuation that it has reason to believe is unreliable. Thus, if FINRA 
requires presentation of a valuation, then in some circumstances a 
member might have to weigh two conflicting obligations, to present a 
valuation or to exclude one that, in the member's judgment, might be 
unreliable.
    The question of whether a valuation is ``unreliable'' may be 
difficult under particular facts. It would require consideration of the 
circumstances under which it was developed, the evidence of any ``red 
flags'' that indicate it may be unreliable and the significance of 
various aspects of the methodology. The difficulty is compounded by the 
fact that the valuation has been developed by the sponsor, not the 
member. FINRA believes that if presentation of a valuation was 
optional, then the rule would not deter the member from following up on 
red flags and excluding a valuation that it has reason to believe is 
unreliable. FINRA believes that a requirement to present the valuation 
would place the member in a conundrum: Should it exclude a suspicious 
valuation based upon the limited facts at its disposal, or must it 
present the valuation because the rule requires it? FINRA believes that 
a requirement that might discourage members from being vigilant would 
not be consistent with the objective of investor protection.
    FINRA believes that members and program sponsors have a strong 
incentive to provide these valuations; they know that their customers 
react very negatively to seeing their positions shown without a value. 
If the Commission approves the proposal, FINRA will monitor for changes 
to business practices and, if there is a significant shift to not 
presenting a valuation, then FINRA will reconsider the optional nature 
of the proposal.
    FINRA recognizes that the question of whether to require a 
valuation in all customer account statements of a general securities 
member is fundamental to the proposal. FINRA will carefully review any 
comments on whether a valuation should be required and whether 
valuations will continue to be made available.
    Among others, FINRA consulted extensively with the Investment 
Program Association's (``IPA'') Task Force on Account Statement 
Reporting. On January 31, 2013, the IPA sent a letter proposing 
``possible solutions which achieve [FINRA's] regulatory objectives and 
enhance transparency, accuracy and understandability of account 
statement reporting for investors.'' \17\ The IPA suggested that 
account statements reflect a net offering price until the earlier of 
(1) an appraisal-based valuation of the securities is published in the 
issuer's periodic or current report, or (2) the filing of the issuer's 
first periodic report following the first anniversary of the date when 
initial escrow is released to commence investments. The IPA proposed to 
define ``net offering price'' as the gross offering price less sales 
commissions and dealer manager fees (i.e., front-end underwriting 
compensation expenses as defined in Rule 2310(b)(4)(c)(ii)) reimbursed 
or paid for with offering proceeds.
---------------------------------------------------------------------------

    \17\ See Letter from IPA Task Force on Account Statement 
Reporting, to Robert L.D. Colby, Chief Legal Officer, FINRA, dated 
January 31, 2013.
---------------------------------------------------------------------------

    The IPA suggested that, following the filing of the issuer's first 
periodic report after the first anniversary of the breaking of escrow, 
the net offering price included on a customer account statement should 
be reduced to reflect that portion, if any, of cumulative distributions 
to investors through the anniversary of the breaking of escrow which 
was provided from borrowings, net offering proceeds, returns of capital 
in distributions from asset sales proceeds, or stock dividends. Such an 
adjustment would capture any dilution of per share value resulting from 
unearned distributions in the initial year following breaking of 
escrow. The IPA suggested that after the filing of the second periodic 
report following the second anniversary of the effective date of the 
first registration of the offering, the account statement should 
reflect the per share estimated value.
    The IPA also recommended amending FINRA Rule 2310(b)(5) to prohibit 
a member from participating in an offering unless the general partner 
or sponsor of the REIT or DPP agrees to provide a per share estimated 
value no later than the filing of the second periodic report following 
the second anniversary of the effective date of the first registration 
of the offering. As noted earlier, FINRA proposes to prohibit a member 
from participating in an offering unless the general partner or sponsor 
of the REIT or DPP agrees to provide a per share estimated value in a 
periodic report filed pursuant to Section 13(a) or 15(d) of the Act, no 
later than the second anniversary of breaking escrow and in each annual 
report thereafter.
    On April 29, 2013, the IPA issued its IPA Guidance recommending 
that REITs, subject to the approval of a valuation committee and its 
board of directors, engage a third-party valuation expert to assist in 
the process of determining an estimated per share value.\18\ The IPA 
Guidance generally recommends that the independent third party be a 
qualified firm with substantial and demonstrable expertise in valuation 
of assets or investments similar to those owned by the REIT, that the 
valuation be first conducted after the closing of the REIT's initial 
public offering and at least once every two years thereafter, that it 
be conducted in accordance with the standards of the Appraisal 
Institute,\19\ and that it be certified by a member of the Appraisal 
Institute with an appropriate designation.
---------------------------------------------------------------------------

    \18\ See IPA Guidance at supra note 13.
    \19\ The Appraisal Institute is a trade organization that, among 
other things, focuses on education, testing, experience and 
demonstration of knowledge, understanding and ability for real 
estate appraisers.
---------------------------------------------------------------------------

    Similarly, the proposed amendments to Rule 2310 would require that 
the general partner or sponsor of the REIT or program agree to ensure 
that the valuation is conducted at least once every two years, is 
derived from a methodology that conforms to standard industry practice, 
and is accompanied by a written opinion to the general partner or 
sponsor of the program or REIT that explains the scope of the review, 
the methodology used to develop the valuation, and the basis for the 
per share estimated value. The proposed rule change also builds upon

[[Page 9539]]

the IPA Guidelines by offering a set of valuation methodologies that 
are similar, but somewhat more expansive.\20\
---------------------------------------------------------------------------

    \20\ For example, the net investment methodology suggested by 
the IPA would not deduct distributions until the end of the first 
year, whereas the current proposal provides for such deductions 
immediately. FINRA believes that investors will be better served by 
understanding immediately the effect of a return of capital as a 
distribution (rather than the use of the capital to generate a 
return on investment) on the value of their investment. Since 
expenses, other than those for distribution--such as program 
management fees--may contribute to a return on investment, the 
current proposal would not deduct those fees in the net investment 
calculation.
---------------------------------------------------------------------------

    As further discussed in Item II.B. below, FINRA does not believe 
that the proposal will cause a significant economic impact on members. 
The current rule, and each of the previously proposed approaches to 
estimated valuation, requires the inclusion of estimated valuations in 
customer account statements in certain circumstances. In contrast, the 
proposal would remove this requirement, while allowing all members to 
voluntarily provide estimated values. Neither the disclosure 
requirements nor the proposed amendments to Rule 2310 should impose a 
significant economic impact on members. The Rule 2310 amendments 
generally build upon the existing requirements and are consistent with 
the IPA's guidance. The disclosures proposed by the amendments are 
substantially similar to those in the existing rule.
    The effective date of the proposed rule change will be announced in 
a Regulatory Notice no later than 90 days following Commission 
approval. In order to give industry participants time to make changes 
to distribution agreements they may wish to implement in response to 
the amendments, the effective date of the proposed rule change will be 
no earlier than 180 days following Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\21\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest.
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    The proposed rule change is necessary for the protection of 
investors in unlisted DPP and REIT securities in that it seeks to 
ensure that per share estimated values for unlisted DPP and REIT 
securities included on customer account statements have been developed 
in a manner reasonably designed to ensure their reliability. The 
proposed rule change also would eliminate the current requirement that 
members must, at a minimum, include on customer account statements the 
per share estimated value of these securities when a value appears in 
the annual report. For the reasons explained earlier, FINRA has 
determined not to explicitly require the presentation of a valuation in 
customer account statements because it could interfere with the 
objective of ensuring that valuations are reliable. Instead, under the 
proposal, a general securities member would not be required to include 
in a customer account statement a per share estimated value for an 
unlisted DPP or REIT security, but any member (not only a general 
securities member) may choose to do so if the value has been developed 
in a manner reasonably designed to ensure that it is reliable, the 
member has no reason to believe that it is unreliable, and the account 
statement includes certain disclosures.
    In addition, the proposed rule change would ensure that customers 
continue to receive meaningful information about the nature of DPPs and 
REITs where a value is not included and, when a value is provided, the 
source of the per share estimate, the methodology by which it is 
developed and the illiquid nature of the securities.

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. As stated above, FINRA believes 
that this proposed rule change is necessary for the protection of 
investors in unlisted DPP and REIT securities who currently often 
receive unreliable per share estimates on their customer account 
statements. Further, the proposed rule change treats all general 
securities members uniformly, including in cases where the general 
securities member voluntarily refrains from including a per share 
estimate, which is permissible under the proposal.
    Each general securities member may choose either to: Refrain from 
including a per share estimated value (though the member must include 
the required disclosures, which are substantially similar to those 
currently required); choose from one of the methodologies described in 
the proposed rule change (so long as the member has no reason to 
believe it is unreliable); \22\ or provide a per share estimated value 
that is derived from some other methodology that was developed in a 
manner reasonably designed to ensure that it is reliable (and so long 
as the member has no reason to believe that it is unreliable).
---------------------------------------------------------------------------

    \22\ FINRA also notes that the methodologies proposed are 
intended to provide general securities members with two acceptable 
approaches where they choose to continue to include per share 
estimated values on customer account statements. Such guidance was 
requested by commenters to the prior proposals, as further discussed 
in Item II.C. below.
---------------------------------------------------------------------------

    Irrespective of the methodology used, any member choosing to 
include a per share estimated value on a customer account statement 
must provide the disclosures required under the proposed rule, which 
also are substantially similar to those currently required. Therefore, 
FINRA does not believe that the proposed rule change will result in any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    In September 2011, FINRA published Notice 11-44 requesting comment 
on proposed amendments to NASD Rule 2340(c). The comment period expired 
on November 12, 2011, and FINRA received 25 comments.\23\ In March 
2012,

[[Page 9540]]

FINRA published Notice 12-14, which re-proposed amendments to NASD Rule 
2340(c) in light of comments received in response to Notice 11-44. The 
comment period expired on April 11, 2012, and FINRA received 17 
comments.\24\ A summary of the comments and FINRA's response is 
provided below.
---------------------------------------------------------------------------

    \23\ See Letters to Marcia Asquith, Senior Vice President and 
Corporate Secretary, FINRA, from: Ryan Bakhtiari, President, Public 
Investors Arbitration Bar Association (``PIABA''), dated November 
11, 2011; David Bellaire, General Counsel and Director of Government 
Affairs, Financial Services Institute, dated November 11, 2011; 
Stephanie Brown, Managing Director and General Counsel, LPL 
Financial, dated November 12, 2011; Richard Chess, President, Real 
Estate Investment Securities Association (``REISA''), dated November 
12, 2011; Ryan Conley, Senior Vice President, Franklin Square 
Holdings, L.P. (``Franklin Square''), dated November 11, 2011; 
Martel Day, Chairman, IPA, dated November 11, 2011; DFPG 
Investments, Inc., undated; Daniel Gilbert and Timothy O'Toole, 
NorthStar Realty Finance (``NorthStar''), dated November 11, 2011; 
Jon Hale, President, Partnership Consultants, Inc., dated November 
11, 2011; Jon Hale, President, Partnership Consultants, Inc., dated 
November 11, 2011; Jack Herstein, President, North American 
Securities Administrators Association, Inc. (``NASAA''), dated 
November 18, 2011; David Hirschmann, President and Chief Executive 
Officer, U.S. Chamber of Commerce, dated November 11, 2011; Charlie 
Howell and Laura Stankosky; William Jacobson and Brittany Ruiz, 
Cornell University Law School, dated November 11, 2011; John 
Kearney, General Counsel, Research and Due Diligence Association, 
Inc., dated November 11, 2011; Randy Lewis, President, Ascent Real 
Estate Securities, LLC, dated November 11, 2011; Thomas Price, 
Managing Director, Securities Industry and Financial Markets 
Association (``SIFMA''), dated November 10, 2011; Prodigious, LLC 
(``Prodigious''), dated November 11, 2011; Jeffrey Rubin, Federal 
Regulation of Securities Committee Chair, American Bar Association 
(``ABA''), dated November 16, 2011; Nicholas Schorsch and Michael 
Weil, American Realty Capital, dated November 11, 2011; James 
Stanfield, Chief Executive Officer, VSR Financial Services, Inc., 
dated November 11, 2011; Gordon Taylor, Vice President and Chief 
Compliance Officer, Dividend Capital Securities LLC, dated November 
17, 2011; Steven Wechsler, President and CEO, National Association 
of Real Estate Investment Trusts (``NAREIT''), dated November 11, 
2011; Daniel Wildermuth, Chief Executive Officer, Kalos Financial, 
undated; and W.P. Carey & Co. LLC (``W.P. Carey''), dated November 
11, 2011.
    \24\ See Letters to Marcia Asquith, Senior Vice President and 
Corporate Secretary, FINRA, from: Ryan Bakhtiari, President, PIABA, 
dated April 11, 2012; Martel Day, Chairman, IPA, dated April 11, 
2012; Michael Forman, Chief Executive Officer, Franklin Square, 
dated April 11, 2012; Mark Gatto and Michael Reisner, ICON 
Investments, dated April 12, 2012; Daniel Gilbert and W. Timothy 
Toole, NorthStar, dated April 11, 2012; Jon Hale, President, 
Partnership Consultants, Inc., dated March 22, 2012; Jack Herstein, 
NASAA, dated April 11, 2012; David Hirschmann, President and Chief 
Executive Officer, U.S. Chamber of Commerce, dated April 11, 2012; 
Daniel Oschin, President, REISA, dated April 11, 2012; Prodigious, 
dated April 12, 2012; Jeffrey Rubin, Federal Regulation of 
Securities Committee Chair, ABA, dated April 9, 2012; Nicholas 
Schorsch and Michael Weil, American Realty Capital, dated April 11, 
2012; Steven Wechsler, President and CEO, NAREIT, dated April 11, 
2012; and W.P. Carey, dated April 11, 2012.
    See also Letters to Robert Colby, Chief Legal Officer, FINRA, 
from: IPA Task Force on Account Statement Reporting, IPA, dated 
January 31, 2013; Steven Wechsler, President and CEO, NAREIT, dated 
March 8, 2013; and Mark Goldberg, Chairman, IPA, dated January 14, 
2013.
---------------------------------------------------------------------------

Notice 11-44 Proposal
    In Notice 11-44, FINRA proposed several modifications to NASD Rule 
2340 that were designed to improve the quality of the information 
provided to customers on account statements. The amendments proposed in 
Notice 11-44 would have limited the period of time during which per 
share estimated values could be based on the gross offering price to 
the initial three-year offering period provided for under Rule 
415(a)(5) of the Securities Act. These amendments also would have 
required firms to deduct organization and offering expenses from the 
gross offering price to arrive at a per share estimated value (i.e., a 
net offering price). In addition, these amendments would have 
prohibited a firm from using a per share estimated value from any 
source, if it ``knows or has reason to know the value is unreliable,'' 
based upon publicly available information or nonpublic information that 
came to the firm's attention. Finally, in Notice 11-44 FINRA proposed 
to permit members to refrain from providing a per share estimated value 
on a customer account statement if the most recent annual report of the 
DPP or REIT did not contain a value that complied with the disclosure 
requirements of NASD Rule 2340.
    While commenters generally supported the proposed changes in Notice 
11-44, the most notable comments concerned using a value other than the 
public offering price during the initial offering period and imposing 
an affirmative duty on members to monitor and confirm the reliability 
of the per share estimated value given the proposed requirement that 
the member must refrain from using the value if it knows or ``had 
reason to know'' that the value was unreliable.\25\
---------------------------------------------------------------------------

    \25\ ABA and SIFMA.
---------------------------------------------------------------------------

Notice 12-14 Proposal
    FINRA considered the comments received in response to Notice 11-44 
and issued Notice 12-14 reflecting changes that were responsive to the 
comments received. Under the revised proposal in Notice 12-14, general 
securities members would no longer be required to provide a per share 
estimated value, unless and until the issuer provided an estimate based 
on an appraisal of assets and liabilities in a periodic or current 
report. During the initial offering period, member firms would have the 
option of using a modified net offering price or designating the 
securities as ``not priced.'' The revised proposal also modified the 
account statement disclosures that accompany per share estimated 
values. Notice 12-14 also included alternative disclosure requirements 
for DPPs or REITs that calculate a daily net asset value (``NAV'').
    While most commenters supported the use of a modified net offering 
price on the customer account statement during the initial offering 
period,\26\ some commenters requested that FINRA change the proposed 
rule language to uniformly state whether the net offering price should 
exclude fees other than front-end underwriting compensation expenses, 
as opposed to requiring it ``at a minimum.'' \27\
---------------------------------------------------------------------------

    \26\ American Realty Capital, NAREIT, REISA and U.S. Chamber of 
Commerce.
    \27\ NASAA and NorthStar.
---------------------------------------------------------------------------

    Further, while some commenters supported FINRA's proposed use of a 
``not priced'' option,\28\ other commenters objected to members 
designating securities as ``not priced'' on the customer account 
statement.\29\ In light of these comments, FINRA's proposal would, as 
described above, allow members to choose to not provide a per share 
estimated value for an unlisted DPP or REIT security on the customer 
account statement, but any member could do so if the value has been 
developed in a manner reasonably designed to ensure that it is 
reliable, the member has no reason to believe that it is unreliable, 
and the account statement includes certain disclosures.
---------------------------------------------------------------------------

    \28\ ABA and NASAA.
    \29\ Franklin Square, IPA, NAREIT, NorthStar and PIABA.
---------------------------------------------------------------------------

    FINRA received several comments on the use of a per share estimated 
value based upon an appraisal or valuation of the program's assets and 
operations. While some objected,\30\ several commenters supported the 
use of a per share estimated value, as proposed,\31\ while others 
suggested that FINRA require the use of an independent third-party 
valuation service to provide the value.\32\ Some commenters requested 
that FINRA, at a minimum, clarify whether it would create or require 
members to use a standardized valuation methodology.\33\ In view of the 
broad range of DPPs and REITs existing in the marketplace, FINRA 
believes that the current proposal permits flexibility in choosing a 
methodology for developing an independent valuation.
---------------------------------------------------------------------------

    \30\ ABA, ICON Investments, IPA and NAREIT.
    \31\ American Realty Capital and W.P. Carey.
    \32\ NASAA.
    \33\ NASAA and Prodigious.
---------------------------------------------------------------------------

    Several commenters requested that FINRA broaden the proposal to 
accommodate programs, such as business development companies that use a 
NAV on a periodic basis.\34\ The new proposed amendments do not specify 
the use of a daily NAV, but rather would accommodate any DPP or REIT 
that provides a per share estimated value reflecting a valuation 
disclosed in the issuer report where a third-party valuation expert or 
experts determine, or provide material assistance in the process of 
determining, the valuation.
---------------------------------------------------------------------------

    \34\ American Realty Capital, IPA, and NAREIT.
---------------------------------------------------------------------------

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:

[[Page 9541]]

    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Two commenters requested that the Commission provide a 90-day 
comment period for the proposal, arguing that the rule was complex and 
technical. The Dodd-Frank Wall Street Reform and Consumer Protection 
Act of 2010 provides for 45 days (with a possible extension up to 90 
days) for the Commission to act on proposed SRO rule changes. In light 
of this statutory deadline, the Commission is not extending the comment 
period at this time.
    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-FINRA-2014-006 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2014-006. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of FINRA. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly.
    All submissions should refer to File Number SR-FINRA-2014-006 and 
should be submitted on or before March 12, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
---------------------------------------------------------------------------

    \35\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-03573 Filed 2-18-14; 8:45 am]
BILLING CODE 8011-01-P