[Federal Register Volume 79, Number 140 (Tuesday, July 22, 2014)]
[Notices]
[Pages 42590-42592]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-17150]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72626; File No. SR-FINRA-2014-006]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Amendment No. 1 to Proposed Rule 
Change Relating to Per Share Estimated Valuations for Unlisted DPP and 
REIT Securities

July 16, 2014.

I. Introduction

    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''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend provisions in the FINRA 
rulebook 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 Notice of 
Filing.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Exchange Act Release No. 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; 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; Mark Goldberg, Chairman, Investment Program 
Association, dated March 12, 2014; 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; 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; 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; and Jacob Frydman, Chairman and CEO, United Realty Trust 
Incorporated, dated March 12, 2014. Comment letters are available at 
www.sec.gov.

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[[Page 42591]]

    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.
    On May 20, 2014, the Commission issued an order instituting 
proceedings pursuant to Section 19(b)(2)(B) of the Act \5\ to determine 
whether to approve or disapprove the proposed rule change. The order 
was published for comment in the Federal Register on May 27, 2014.\6\ 
The Commission received five (5) comment letters in response to the 
order.\7\
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    \5\ 15 U.S.C. 78s(b)(2)(B).
    \6\ Exchange Act Release No. 72193 (May 20, 2014), 79 FR 30217 
(May 27, 2014) (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). 
The comment period closed on June 26, 2014.
    \7\ Letters to Elizabeth Murphy, Secretary, SEC, from David 
Bellaire, Executive Vice President and General Counsel, dated June 
26, 2014; Thomas Price, Managing Director, Securities Industry and 
Financial Markets Association, dated June 26, 2014; Mark Kosanke, 
President, Real Estate Investment Securities Association, dated June 
26, 2014; Jason Doss, President, Public Investors Arbitration Bar 
Association, dated June 25, 2014; and Kenneth Mills, dated June 24, 
2014. Comment letters are available at www.sec.gov.
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    On July 11, 2014, FINRA filed a letter responding to comments and 
Amendment No. 1 to the proposed rule change.\8\ The text of Amendment 
No. 1 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. Amendment No. 1 is described in Item II below, which has been 
substantially prepared by FINRA. The Commission is publishing this 
notice to solicit comments on the proposed rule change, as amended, 
from interested persons.
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    \8\ Letter to Kevin O'Neill, Deputy Secretary, SEC, from Matthew 
Vitek, Associate General Counsel, FINRA, dated July 11, 2014 
(``Response Letter''). FINRA's Response Letter is available at 
www.sec.gov.
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II. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Amendment

    As further described in the Notice of Filing, FINRA is proposing 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 unlisted DPP or REIT securities.
    In response to comments received by the Commission, FINRA is 
proposing to amend the proposed rule change as follows:
    1. FINRA is revising proposed NASD Rule 2340(c) to require general 
securities members to include in customer account statements a per 
share estimated value for a DPP or REIT security developed in a manner 
reasonably designed to ensure that the per share estimated value is 
reliable. Thus, FINRA is eliminating the voluntary or ``not priced'' 
option originally proposed. Moreover, FINRA is revising proposed NASD 
Rule 2340(c)(1) to state that the per share estimated value will be 
deemed to have been developed in a manner reasonably designed to ensure 
that it is reliable if the member uses one of the two specified 
methodologies.
    2. FINRA is eliminating the ``no reason to believe that the per 
share estimated value is unreliable'' standard from the general 
provision in proposed NASD Rule 2340(c). As revised, proposed NASD Rule 
2340(c) would require disclosure of valuations and proposed NASD Rule 
2340(c)(1) would deem valuations calculated under the two defined 
methodologies to have been developed in a manner reasonably designed to 
ensure that they are reliable. As a result, FINRA believes the ``no 
reason to believe that the per share estimated value is unreliable'' 
standard in the general provision in proposed NASD Rule 2340(c) is not 
necessary.
    3. FINRA is removing the ``over distribution'' deduction from the 
per share estimated value in the ``net investment'' methodology in 
proposed NASD Rule 2340(c)(1)(A)(ii) and replacing it with enhanced 
disclosure of ``over distribution'' on customer account statements. As 
revised, proposed NASD Rule 2340(c)(2)(A) would require account 
statements that include a ``net investment'' per share estimated value 
for a DPP or REIT security to disclose, if applicable, prominently and 
in proximity to disclosure of distributions and the per share estimated 
value the following: ``IMPORTANT--Part of your distribution includes a 
return of capital. Any distribution that represents a return of capital 
reduces the estimated per share value shown on your account 
statement.''
    4. FINRA is revising the ``net investment'' methodology in proposed 
NASD Rule 2340(c)(1)(A) to make clear that firms may use the maximum 
offering percentage when the issuer provides a range of amounts 
available for investment unless the member has reason to believe that 
such percentage is unreliable, in which case the member must use the 
minimum offering percentage.
    5. FINRA is modifying the ``net investment'' methodology in 
proposed NASD Rule 2340(c)(1)(A) to lengthen the time period in which 
members may use the ``net investment'' methodology. The proposed rule 
change, as amended, would allow ``net investment'' values to be 
included on customer account statements at any time before 150 days 
following the second anniversary of breaking escrow. FINRA is making a 
parallel change to proposed FINRA Rule 2310(b)(5)(B)(i).
    6. FINRA is modifying proposed FINRA Rule 2310(b)(5)(B) to clarify 
issuer disclosure requirements, including the elimination of the 
requirement to identify the service used to obtain a valuation, and 
require more frequent valuations. As revised, proposed FINRA Rule 
2310(b)(5)(D)(i) would require that the per share estimated value be 
based on valuations of the assets and liabilities of the DPP or REIT 
performed at least annually by, or with the material assistance or 
confirmation of, a third-party valuation expert or service.
    7. FINRA is modifying proposed FINRA Rule 2310(b)(5) to 
specifically except DPPs that are subject to the Investment Company Act 
of 1940 (``1940 Act'') from the requirements under the rule in 
recognition that business development companies that fall under the 
definition of DPP are subject to an existing regulatory framework under 
the 1940 Act for determining and publishing net asset value on a 
regular basis. In addition, FINRA is revising proposed NASD Rule 
2340(c)(1)(B) to state, in the case of DPPs subject to the 1940 Act, 
the appraised value methodology under Rule 2340(c)(1)(B) shall be 
consistent with the valuation requirements of the 1940 Act and the 
rules thereunder.
    8. FINRA is extending the effective date of the proposed rule 
change to no earlier than 18 months following Commission approval. 
FINRA believes this extended timeframe will give industry participants 
time to make adjustments to product structures and any necessary 
operational changes.
    FINRA is also proposing the following changes:

[[Page 42592]]

    1. FINRA is proposing to change the title of NASD Rule 2340(c) from 
``Unlisted DPP/REIT Securities'' to ``DPP and Unlisted REIT 
Securities'' to more accurately reflect the types of securities that 
are subject to the rule. FINRA also is changing the title of proposed 
NASD Rule 2340(c)(1)(B) from ``independent valuation'' to ``appraised 
value'' to more accurately reflect the per share estimated value 
methodology.
    2. FINRA is revising the ``net investment'' methodology in proposed 
NASD Rule 2340(c)(1)(A)(i) to clarify that ``another equivalent 
disclosure'' means ``another equivalent disclosure that reflects the 
estimated percentage deduction from the aggregate dollar amount of 
securities registered for sale to the public of sales commissions, 
dealer manager fees, and estimated issuer offering and organization 
expenses.''
    3. FINRA is modifying the ``appraised value'' methodology to 
clarify in proposed NASD Rule 2340(c)(1)(B) that the member may include 
a per share estimated value reflecting an appraised valuation disclosed 
in the Issuer Report based on the valuations of the assets and 
liabilities of the DPP or REIT performed at least annually by, or with 
the material assistance or confirmation of, a third-party valuation 
expert or service and derived from a methodology that conforms to 
standard industry practice.
    4. FINRA is eliminating the required disclosures in proposed NASD 
Rule 2340(c)(2)(A)(i) regarding characteristics of the per share 
estimated value and proposed NASD Rule 2340(c)(2)(B) on the ``not 
priced'' option. FINRA believes that streamlined disclosure will be 
more effective than also requiring an account statement to describe per 
share estimated value, its source, and the method by which it was 
developed, as would have been required under the originally proposed 
NASD Rule 2340(c)(2)(A)(i). In addition, FINRA believes the disclosures 
in proposed NASD Rule 2340(c)(2)(B) are no longer necessary because the 
revised proposal requires a general securities member to include in a 
customer account statement a per share estimated value of a DPP or REIT 
security.
    5. FINRA is modifying proposed FINRA Rule 2310(b)(5) to state that 
a member shall not participate in a public offering of the securities 
of a DPP that is not subject to the requirements of the 1940 Act or of 
a REIT unless they meet the requirements under the rule. In addition, 
FINRA is revising proposed FINRA Rule 2310(b)(5)(A) to clarify that the 
issuer of the DPP or REIT must agree to disclose a per share estimated 
value of the DPP or REIT security, developed in a manner reasonably 
designed to ensure it is reliable, in the DPP or REIT periodic reports 
filed pursuant to Section 13(a) or 15(d) of the Exchange Act.
    6. FINRA is clarifying in proposed FINRA Rule 2310(b)(5)(D)(iii) 
that the valuation must be accompanied by a written opinion or report 
by the issuer, delivered at least annually to the broker-dealer, that 
explains the scope of the review, the methodology used to develop the 
valuation or valuations, and the basis for the value or values 
reported.
    7. FINRA is making a technical change to delete FINRA Rule 
5110(f)(2)(L) instead of the originally proposed deletion of FINRA Rule 
5110(f)(2)(M) because FINRA renumbered the subparagraphs of FINRA Rule 
5110(f)(2) after the filing of the proposed rule change.\9\
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    \9\ See Exchange Act Release No. 72114 (May 7, 2014), 79 FR 
27355 (May 13, 2014) (Order Approving a Proposed Rule Change; SR-
FINRA-2014-004).
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III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended by Amendment No. 1, 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 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 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 August 12, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-17150 Filed 7-21-14; 8:45 am]
BILLING CODE 8011-01-P