State, Time Issues Hamper New Investment Rules

INDIANAPOLIS-While the purpose of the financial reform bill was to inform and protect consumers, the locally-based Real Estate Investment Securities Association believes there may be significant delays and questions about how these changes will affect real estate investors. During a recent webinar, members said that certain new rules could take a year or more to implement, and states just don’t have the manpower to take on oversight.

The association members discussed various changes required for investment advisors and broker-dealers due to the approval of the Dodd-Frank Wall Street Reform and Consumer Protection Act on July 21. While investment advisors deal solely with securities, there are broker dealers that do as well, including real estate securities.

For example, said association member Deborah Froling with Arent Fox LLP, most dealing with real estate funds are exempt from investment advisor regulatory rules. However, as of July 21, 2011, hedge funds and private fund equity advisors are no longer exempt from SEC registration, she said. “If a component of your fund is the buying, selling and purchasing of securities, you may have to register as an investment advisor,” she said during the webinar. “Sponsors may fall within the definition of investment advisor going forward.” Also, SEC registration will include substantial new reporting and disclosure requirements.

Of course, there are still a lot of questions and issues to be worked out with this act, and moderator Bill Winn with Passco Cos. LLC said the association will now be lobbying the SEC as to what decisions are finalized. For example, the SEC will study the creation of a uniform fiduciary standard for both investment advisors and broker-dealers, with the taking of public comment over the next year and a recommendation to Congress in January. “We oppose a fiduciary standard for broker-dealers. We are going to be lobbying, we don’t believe it should be applied across all products.”

Another issue in question is that the SEC is turning its oversight of small and mid-size investment advisors to the states by July 2011. The intent is to one day have the states take over registration of all but the larger firms, and examination and enforcement for all investment advisors. However, this may prove impossible, given that many states are already strapped for cash and have cut staff to the bone in budget sessions, said REISA Executive Director Brandon Balkman. “Texas said they can do the job, but others, like my home state, Utah, they laughed. They have less than five people, they can’t go out and inspect,” Balkman said.

There are other areas where the SEC is charged with finding a solution, but have been given no timetable, such as restricting or prohibiting mandatory pre-dispute arbitration clauses in contracts, and issuing rules requiring broker-dealers provide point-of-sale disclosures. Winn said the association will continue to monitor these issues for its members.