Regulator wants to firm up pricing of illiquid securities

Finra is continuing to shake up the way broker-dealers show the value of illiquid investments such as non-traded real estate investment trusts and private placements on clients' account statements.

Finra is continuing to shake up the way broker-dealers show the value of illiquid investments such as non-traded real estate investment trusts and private placements on clients’ account statements.
Last week, the board of governors of the Financial Industry Regulatory Authority Inc. authorized staff to issue a regulatory notice on the amendments to the rule.
The proposed amendments would change how client account statements showed an illiquid securities estimated value.
For example, the proposals include requiring broker-dealers to subtract upfront fees and expenses that are deducted from the offering proceeds if par value is listed as the estimated value of the shares. At the moment, shares of non-traded REITs, for example, are listed at par.
Another proposal would permit broker-dealers to use par value for the investment only under the initial offering period, and not during the secondary period.
And broker-dealers, already feeling the strain from new compliance guidelines, would have an extra hurdle of compliance under the proposed guidelines. The proposed amendment would clarify that if the broker-dealer had reason to think that the estimated per share value in the offering’s annual report were inaccurate, then the broker-dealer would have to remove that value from its account statements.
Finra posted an update about its board of governors meeting to its website Friday.
The estimated value of illiquid investments such as shares of non-traded REITs has been on Finra’s radar since at least 2009. That was when Finra issued a notice to broker-dealers prohibiting firms from using data that were more than 18 months old to estimate the value of non-traded REITs after the REITs had concluded their offerings.
Before that, broker-dealers routinely listed the estimated value of non-traded REITs at “par,” or at what price they had been sold to the public. This practice came under scrutiny during and after the credit crisis, when many non-traded REITs, which invest in commercial real estate, cut dividends and limited redemptions to investors.
Recently, the issue of the estimated value of a non-traded REIT again gained notice, as clients of David Lerner Associates Inc. at the end of last month received account statements that showed the estimated value of shares in real estate investment trusts from Apple REIT Cos. Inc. was “not priced.”
For years, shares of the Apple REITs were listed as $11 on client account statements. At the end of May, Finra filed a complaint against David Lerner Associates, alleging that the firm was misleading investors and marketing unsuitable investment products to them.
Non-traded REITs are sold primarily through independent-contractor broker-dealers. The industry has exploded recently, with the number of REIT products practically quadrupling to 45 during the past 10 years.
Nancy Condon, a spokeswoman for Finra, said the organization had no comment. Jessica Pochylski, a spokeswoman for David Lerner, was not immediately available for comment.