Early last week the Financial Industry Regulatory Authority (FINRA) proposed changes to the Securities and Exchange Commission (SEC) regarding the ambiguous and nebulous position of nontraded real estate interest trusts (REITs). The new rules seek to improve the valuations of REITs.
“Nontraded REITs have been a subject of concern for a considerable time,” commented Peter Mougey, a partner with the Levin, Papantonio law firm and director of the firm’s Business Torts and Securities Litigation departments. “Nontraded REITs charge exorbitant fees and costs and are designed to maximize commissions not as a portion of a well-allocated portfolio.”
The new rule will affect valuations by taking into account the fees and commissions paid to brokers and dealer managers. FINRA notes that these fees and commissions could have the effect of reducing the share price for customers.
“For many clients, the true impact of the costs and commissions on the performance of their investment is never explained by their financial advisor,” Mr. Mougey added. “And that’s exactly what their job is.”
The FINRA changes propose that the SEC recommend brokers, dealers and advisors provide “reliable” values of a REIT by according to either the net investment or via an independent valuation.
An independent valuation of an REIT would require that a third-party expert evaluate and provide “material assistance in the process of determining” the valuation.
For now, the proposed rule is with the SEC and nontraded REITs remain a potentially dangerous investment for anyone.