[Federal Register Volume 79, Number 101 (Tuesday, May 27, 2014)]
[Notices]
[Pages 30217-30219]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-12072]
[[Page 30217]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72193; File No. SR-FINRA-2014-006]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Instituting Proceedings To Determine Whether To
Approve or Disapprove a Proposed Rule Change Relating to per Share
Estimated Valuations for Unlisted DPP and REIT Securities
May 20, 2014.
I. Introduction
On January 31, 2014, the 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''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend provisions in the NASD
and FINRA rulebooks addressing per share estimated valuations for
unlisted direct participation program (``DPP'') and real estate
investment trust (``REIT'') securities. The proposed rule change was
published for comment in the Federal Register on February 19, 2014.\3\
The Commission received eighteen (18) comment letters in response to
the proposed rule change.\4\ On March 14, 2014, FINRA extended the time
period in which the Commission must approve the proposed rule change,
disapprove the proposed rule change, or institute proceedings to
determine whether to approve or disapprove the proposed rule change to
May 20, 2014. The Commission is publishing this order to institute
proceedings pursuant to Section 19(b)(2)(B) of the Act \5\ to determine
whether to approve or disapprove the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Release No. 34-71545 (Feb. 12, 2014), 79 FR 9535 (Feb.
19, 2014) (Notice of Filing of Proposed Rule Change Relating to Per
Share Estimated Valuations for Unlisted DPP and REIT Securities)
(``Notice of Filing''). The comment period closed on March 12, 2014.
\4\ Letters to Elizabeth Murphy, Secretary, SEC, from Mark
Goldberg, Chairman, Investment Program Association, dated February
5, 2014; David Bellaire, Executive Vice President and General
Counsel, Financial Services Institute, dated February 5, 2014; Mark
Kosanke, President, Real Estate Investment Securities Association,
dated February 11, 2014; Steven Wechsler, President and CEO,
National Association of Real Estate Investment Trusts, dated
February 14, 2014; Kirk Montgomery, Head of Regulatory Affairs, CNL
Financial Group, LLC, dated March 12, 2014; Dechert LLP, dated March
12, 2014 (``Dechert Letter''); Jeff Johnson, CEO, Dividend Capital
Diversified Property Fund Inc., dated February 28, 2014; David
Bellaire, Executive Vice President and General Counsel, Financial
Services Institute, dated March 12, 2014 (``FSI Letter''); Mark
Goldberg, Chairman, Investment Program Association, dated March 12,
2014 (``IPA Letter''); Michael Crimmins, CEO and Managing Director,
KBS Capital Markets Group, dated February 28, 2014; Steve Morrison,
Senior Vice President and Associate Counsel, LPL Financial, dated
March 12, 2014; Steven Wechsler, President and CEO, National
Association of Real Estate Investment Trusts, dated March 12, 2014
(``NAREIT Letter''); Martel Day, Principal, NLR Advisory Services,
LLC, dated March 12, 2014; Scott Ilgerfritz, Immediate Past-
President, Public Investors Arbitration Bar Association, dated March
11, 2014; Mark Kosanke, President, Real Estate Investment Securities
Association, dated March 12, 2014 (``REISA Letter''); Thomas Price,
Managing Director, Securities Industry and Financial Markets
Association, dated March 12, 2014; David Hirschmann, President and
CEO, U.S. Chamber of Commerce, Center for Capital Markets
Competitiveness, dated March 12, 2014 (``Chamber of Commerce
Letter''); Jacob Frydman, Chairman and CEO, United Realty Trust
Incorporated, dated March 12, 2014.
\5\ 15 U.S.C. 78s(b)(2)(B).
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Institution of proceedings does not indicate that the Commission
has reached any conclusions with respect to the proposed rule change,
nor does it mean that the Commission will ultimately disapprove the
proposed rule change. Rather, as discussed below, the Commission seeks
additional input from interested parties on the issues presented by the
proposal.
II. Description of the Proposed Rule Change
NASD Rule 2340 (Customer Account Statements)
NASD Rule 2340 generally requires that general securities members
\6\ 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. As further
described in the Notice of Filing, FINRA proposes to amend NASD Rule
2340 to eliminate the requirement contained in paragraph (c) that a
general securities member disclose in a customer's account statement a
per share estimated value of the customer's unlisted DPP or REIT
securities holdings, provided that such a value is reflected in the
DPP's or REIT's annual report. Thus, under the proposal, a general
securities member would no longer be required to include a per share
estimated value for an unlisted DPP or REIT security in a customer
account statement, but any member may 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. FINRA proposes
two methodologies under which an estimated value would be presumed to
have been developed in a manner reasonably designed to ensure that it
is reliable: (1) The net investment methodology; and (2) the
independent valuation methodology.
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\6\ 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.
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The net investment methodology would reflect the ``net investment''
disclosed in the issuer's most recent periodic or current report. The
``net investment'' would 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.\7\ 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. Moreover, the deduction for each distribution would be
limited to the full amount of the distribution.
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\7\ FINRA states that 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 states that it 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.
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The independent valuation methodology would consist of the most
recent valuation disclosed in the issuer's periodic or current reports.
It would also require that a third-party valuation expert or experts
determine, or provide material assistance in the process of
determining, the valuation.\8\
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\8\ According to FINRA, 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'' (Apr. 29,
2013).
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FINRA Rule 2310 (Direct Participation Programs)
FINRA Rule 2310 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
[[Page 30218]]
pursuant to Section 13(a) of the Act: (1) A per share estimated value
of the securities; (2) the method by which the estimated value was
developed; and (3) the date of the data used to develop the estimated
value.\9\
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\9\ FINRA Rule 2310(b)(5) (Valuation for Customer Account
Statements).
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As further described in the Notice of Filing, FINRA proposes to
amend FINRA Rule 2310 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 Section 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; (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 DPP 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 DPP 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.
III. Summary of Comments
While the commenters to the Notice of Filing generally expressed
support for the goals of the proposed rule change, they raised a number
of concerns regarding various aspects of the proposal. For instance,
several commenters opposed the deduction of offering and organizational
costs from the share price under the net investment methodology, citing
difficulties in accurately determining those expenses.\10\ A number of
commenters also opposed the net investment methodology's deduction of
``over-distributions'' from the share value, arguing, among other
things, that such a requirement was unprecedented and would have severe
implementation challenges, as well as unintended negative consequences,
such as actually reducing the level of investor understanding regarding
the sources of distributions.\11\
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\10\ See, e.g., REISA Letter.
\11\ See, e.g., IPA Letter.
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Many commenters opposed the elimination of any requirement to
include a per share valuation of unlisted DPP or REIT securities in
customer account statements. Commenters stated that FINRA, in its
proposal, put forth two valuation methodologies that it deems
presumptively reliable, and allowing an unlisted DPP or REIT security
to nevertheless be shown as ``not priced'' in customer account
statements would deprive investors of useful information and be viewed
as a retreat from a policy of transparency.\12\
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\12\ Id.
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In addition, some commenters raised concerns about the proposed
rule change's anticipated implementation period.\13\ These commenters
favored a longer period in order to minimize investor confusion and
avoid market disruption as the industry develops the appropriate
controls and procedures to comply with the rule.
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\13\ See, e.g., NAREIT Letter.
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Commenters further questioned, among other things, the timing of
the initiation of valuations for unlisted DPP and REIT securities under
FINRA Rule 2310; \14\ the frequency with which valuations are estimated
under FINRA Rule 2310; \15\ the effect of the proposed rule change on
business development companies and daily NAV REITs; \16\ and the lack
of an economic analysis.\17\
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\14\ See, e.g., IPA Letter.
\15\ See, e.g., FSI Letter.
\16\ See, e.g., Dechert Letter.
\17\ See, e.g., Chamber of Commerce Letter.
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On May 16, 2014, FINRA noted that it is still considering the
points raised by commenters and anticipates filing an official response
in the near future.\18\
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\18\ See Letter from Matthew Vitek, Assistant General Counsel,
FINRA, to Kevin O'Neill, Deputy Secretary, SEC, dated May 16, 2014.
Any FINRA response will be included in the comment file for this
rule filing.
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-FINRA-
2014-006 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act to determine whether the proposed rule change
should be approved or disapproved.\19\ Institution of such proceedings
appears appropriate at this time in view of the legal and policy issues
raised by the proposal. As noted above, institution of proceedings does
not indicate that the Commission has reached any conclusions with
respect to any of the issues involved. Rather, the Commission seeks and
encourages interested persons to comment on the issues presented by the
proposed rule change and provide the Commission with arguments to
support the Commission's analysis as to whether to approve or
disapprove the proposal.
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\19\ 15 U.S.C. 78s(b)(2). Section 19(b)(2)(B) of the Act
provides that proceedings to determine whether to disapprove a
proposed rule change must be concluded within 180 days of the date
of publication of notice of the filing of the proposed rule change.
The time for conclusion of the proceedings may be extended for up to
an additional 60 days if the Commission finds good cause for such
extension and publishes its reasons for so finding or if the self-
regulatory organization consents to the extension.
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Pursuant to Section 19(b)(2)(B) of the Act,\20\ the Commission is
providing notice of the grounds for disapproval under consideration. In
particular, Section 15A(b)(6) of the Act \21\ 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. In addition, Section 15A(b)(9) of the Act \22\
requires that FINRA rules not impose any unnecessary or inappropriate
burden on competition.
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\20\ 15 U.S.C. 78s(b)(2)(B).
\21\ 15 U.S.C. 78o-3(b)(6).
\22\ 15 U.S.C. 78o-3(b)(9).
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The Commission believes FINRA's proposed rule change raises
questions as to whether it is consistent with the requirements of
Section 15A(b)(6) and 15A(b)(9) of the Act.
V. Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues raised by the proposed rule change. In particular, the
Commission invites the written views of interested persons concerning
whether the proposed rule change is inconsistent with Sections
15A(b)(6) and 15A(b)(9), or any other provision, of the Act, or the
rules and regulations thereunder.
Although there do not appear to be any issues relevant to approval
or disapproval which would be facilitated by an oral presentation of
views, data, and arguments, the Commission will consider, pursuant to
Rule 19b-4, any request for an opportunity to make an oral
presentation.\23\ Interested persons
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are invited to submit written data, views, and arguments by June 26,
2014 concerning whether the proposed rule change should be approved or
disapproved. Any person who wishes to file a rebuttal to any other
person's submission must file that rebuttal by July 11, 2014. Comments
may be submitted by any of the following methods:
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\23\ Section 19(b)(2) of the Act, as amended by the Securities
Acts Amendments of 1975, Public Law 94-29, 89 Stat. 97 (1975),
grants the Commission flexibility to determine what type of
proceeding--either oral or notice and opportunity for written
comments--is appropriate for consideration of a particular proposal
by a self-regulatory organization. See Securities Acts Amendments of
1975, Report of the Senate Committee on Banking, Housing and Urban
Affairs to Accompany S. 249, S. Rep. No. 75, 94th Cong., 1st Sess.
30 (1975).
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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 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
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available
for inspection and copying at the principle 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 publicly available.
All submissions should refer to File Number SR-FINRA-2014-006 and
should be submitted on or before July 11, 2014. If comments are
received, any rebuttal comments should be submitted by July 11, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\24\
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\24\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-12072 Filed 5-23-14; 8:45 am]
BILLING CODE 8011-01-P