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Regulation and Compliance > State Regulation > NASAA

NASAA Wants to Align REIT Policy With Reg BI

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What You Need to Know

  • Comments are due by Aug. 11.

The North American Securities Administrators Association is seeking public comment until Aug. 11 on a plan to revise its policy regarding real estate investment trusts by bringing it more into line with the Securities and Exchange Commission’s Regulation Best Interest.

Melanie Senter Lubin, NASAA president and Maryland Securities Commissioner, said in a statement announcing the plan that the proposed revisions “are aimed at updating and enhancing” NASAA’s REIT policy with “key investor protection provisions.”

The group said the statement of policy, last revised in 2007, applies to the qualifications and registrations of REITs.

The proposed revisions “would update the conduct standards for brokers selling non-traded REITs by supplementing the suitability section with references to the SEC’s best interest conduct standard,” NASAA said, and also includes an update to the net income and net worth requirements “through adjusting upward to account for inflation occurring since the last adjustment.”

Anya Coverman, SVP of Government Affairs and general counsel at the Institute for Portfolio Alternatives, told ThinkAdvisor Monday in an email message that beyond the short 30-day comment period, “NASAA’s claims are unsupported as they provided little data and no economic analysis to support any part of this proposal. Beyond this, the proposal fails to address the state of today’s marketplace as they do not distinguish between lifecycle REITs from NAV REITs, the latter of which are almost exclusively sold today.”

Non-traded REITs, Coverman explained, are publicly offered REITs that are not listed on any exchange.

“They must register their securities with the SEC, and the SEC and FINRA regulate the sale of their shares to retail investors,” Coverman continued. “‘Net asset value’ REITs are the only ones sold today. They are continuously offered, and they offer and redeem their shares at the net asset value of the underlying real estate portfolio. Former ‘lifecycle’ REITs had a defined life cycle rather than an objective of being offered continuously.”

Under federal law, Coverman said, “NAV REITs may be sold to any retail investor, subject to a broker-dealer or investment adviser’s determination that they are suitable for the customer. NASAA would cut out many investors.”

NASAA’s plan, Coverman argued, “would do this in two fundamental ways. First, it would limit purchases to investors who meet net worth and gross income tests. Second, it would limit the ability of investors to hold more than a certain percentage of their liquid net worth in these products. Neither requirement is imposed by the SEC or FINRA because these are publicly registered securities, and the broker-dealers and investment advisers who recommend them already must act in the customer’s best interest.”

Other revisions being proposed include:

  • adding a new standardized concentration limit to the suitability section; and
  • adding a new prohibition against using gross offering proceeds as an investment objective or strategy to make distributions.

A recent NASAA report, the proposal explains, ”indicates that many broker-dealer firms have not materially changed their policies, procedures, or practices regarding the sale of non-traded REITs or other complex, costly, and risky products to retail investors since the passage of Reg BI notwithstanding the enhanced care, disclosure, and conflict of interest obligations mandated by the rule.”

The NASAA report also noted, the group said, “that firms recommending non-traded REITs, moreover, had the highest concentration of harmful compensation conflicts of any of the complex, costly, risky products that were recommended by firms examined in the state initiative post-Reg BI.”

NASAA states in the proposal that it has advocated inflationary adjustments in the accredited investor context for purposes of Regulation D, for which figures have not been updated since 1982.

Adjusting the figures with the U.S. Bureau of Labor Statistics Consumer Price Index for All Urban Consumers, purchasers of these securities must have either (a) the combination of a minimum annual gross income of $95,000 and a minimum net worth of $95,000 or (b) a minimum net worth of $340,000.

“The current figures (adopted in 2007) specify the combination of a minimum net income of $70,000 and minimum net worth of $70,000 under (a) or the minimum net worth of $250,000 under (b),” the proposal states.


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