WASHINGTON, DC—Non-traded REITs would be required to provide more disclosure, and to provide it more often, under rule changes approved by the SEC. First proposed by the Financial Industry Regulatory Authority at the start of 2014, the changes now require broker-dealers to include a per-share estimated value for an unlisted direct participation program or REIT on customer statements. An earlier version of the proposal would have made disclosure of estimated values voluntary.

Finra's proposal calls for one of two methodologies to be used in ensuring the reliability of these estimates: net investment or appraised value. In the former, the net investment would be based on the “amount available for investment” percentage shown in the offering prospectus, while the latter method requires a valuation of the assets and liabilities of the DPP or REIT in order to set a share value.

Under the net investment methodology, Finra members would have to indicate in customer account statements that part of the share distribution includes a return of capital. The statement must also mention that “any distribution that represents a return of capital reduces the estimated per-share value shown on your account statement.”

The appraised value methodology requires that such a valuation must be performed at least annually; must be conducted or confirmed by a third-party valuation expert or service; and must be based on a methodology that conforms to standard industry practice. This methodology can be used at any time under the rule changes proposed by Finra and approved by the SEC.

Regardless of which methodology is used, the rule changes require Finra members to include specific disclosures on customer account statements that provide a per-share estimated value for a DPP or REIT security. In particular, the proposal would require a member to include disclosures stating that the security is not listed on a national securities exchange, that it's generally illiquid and that, even if a customer is able to sell the security, the price received may be less than the per share estimated value provided in the statement.

Finra's proposed rule changes also would prohibit a member from participating in a public offering of the securities of a REIT or DPP unless the issuer has agreed to disclose

a per share estimated value that has been developed “in a manner reasonably designed to ensure it is reliable” and disclosed in the DPP's or REIT's periodic reports. Further, a valuation of the DPP or REIT's assets and liabilities must be performed at least annually.

In a memorandum to Finra, SEC deputy secretary Kevin O'Neill wrote that as amended, the proposal “represents a significant improvement to current industry practice concerning the disclosure of the value of unlisted DPP and REIT securities. As amended, the proposal would help ensure that investors receive more accurate information regarding the nature and worth of their holdings of DPP and REIT securities.” He added, however, that although the SEC believes that this rule changes would “improve accuracy and transparency and, consequently, investor protection,” the commission will continue to “monitor the activity in this market for potential abuses.”