The Financial Industry Regulatory Authority has issued Regulatory Notice 15-02 regarding the Securities and Exchange Commission’s approved amendments to National Association of Securities Dealers (NASD) Rule 2340 (and corresponding amendments to FINRA Rule 2310) to modify the requirements relating to the reporting of per share estimated values of shares of direct participation programs (DPPs) and unlisted real estate investment trusts (REITs) on a customer’s account statements.
NASD Rule 2340 currently requires a member firm to include on account statements an estimated value of a DPP or unlisted REIT security from the annual report, an independent valuation service or any other source, unless the member firm can demonstrate that the estimated value is inaccurate. The SEC has approved amendments to NASD Rule 2340(c) to require, among other things, that member firms include on customer account statements a per share estimated value for a DPP or unlisted REIT security developed in a manner reasonably designed to ensure that the per share estimated value is reliable. The amended rule describes two methodologies for calculating the per share estimated value for a DPP or unlisted REIT security that are deemed to have been developed in a manner reasonably designed to ensure that it is reliable: (1) the net investment methodology; and (2) the appraised value methodology. In addition, new NASD Rule 2340(c)(2)(A) requires member firms that use the net investment methodology to provide, if applicable, enhanced disclosure relating to the return of investors’ capital (commonly referred to as “over distributions”).
The SEC also approved corresponding changes to FINRA Rule 2310, which currently provides that a member firm may not participate in a DPP or unlisted REIT offering unless the general partner or sponsor will disclose a per share estimated value in each annual report. Industry practice generally is to use the offering price (or par value) of DPP and unlisted REIT securities as the per share estimated value during the offering period. As amended, FINRA Rule 2310(b)(5) prohibits a member firm from participating in a public offering of the securities of a DPP or unlisted REIT unless the issuer of the DPP or unlisted REIT has agreed to disclose a per share estimated value of the DPP or unlisted REIT security, developed in a manner reasonably designed to ensure its reliability, along with an explanation of the method by which the valuation was developed and the date of the valuation.
Click here to read Regulatory Notice 15-02.