[Federal Register Volume 79, Number 140 (Tuesday, July 22, 2014)]
[Notices]
[Pages 42590-42592]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-17150]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72626; File No. SR-FINRA-2014-006]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Amendment No. 1 to Proposed Rule
Change Relating to Per Share Estimated Valuations for Unlisted DPP and
REIT Securities
July 16, 2014.
I. Introduction
On January 31, 2014, Financial Industry Regulatory Authority, Inc.
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc.
(``NASD'')) filed with the Securities and Exchange Commission (``SEC''
or ``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend provisions in the FINRA
rulebook addressing per share estimated valuations for unlisted direct
participation program (``DPP'') and real estate investment trust
(``REIT'') securities. The proposed rule change was published for
comment in the Federal Register on February 19, 2014.\3\ The Commission
received eighteen (18) comment letters in response to the Notice of
Filing.\4\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Exchange Act Release No. 71545 (Feb. 12, 2014), 79 FR 9535
(Feb. 19, 2014) (Notice of Filing of Proposed Rule Change Relating
to Per Share Estimated Valuations for Unlisted DPP and REIT
Securities) (``Notice of Filing''). The comment period closed on
March 12, 2014.
\4\ Letters to Elizabeth Murphy, Secretary, SEC, from Mark
Goldberg, Chairman, Investment Program Association, dated February
5, 2014; David Bellaire, Executive Vice President and General
Counsel, Financial Services Institute, dated February 5, 2014; Mark
Kosanke, President, Real Estate Investment Securities Association,
dated February 11, 2014; Steven Wechsler, President and CEO,
National Association of Real Estate Investment Trusts, dated
February 14, 2014; Kirk Montgomery, Head of Regulatory Affairs, CNL
Financial Group, LLC, dated March 12, 2014; Dechert LLP, dated March
12, 2014; Jeff Johnson, CEO, Dividend Capital Diversified Property
Fund Inc., dated February 28, 2014; David Bellaire, Executive Vice
President and General Counsel, Financial Services Institute, dated
March 12, 2014; Mark Goldberg, Chairman, Investment Program
Association, dated March 12, 2014; Michael Crimmins, CEO and
Managing Director, KBS Capital Markets Group, dated February 28,
2014; Steve Morrison, Senior Vice President and Associate Counsel,
LPL Financial, dated March 12, 2014; Steven Wechsler, President and
CEO, National Association of Real Estate Investment Trusts, dated
March 12, 2014; Martel Day, Principal, NLR Advisory Services, LLC,
dated March 12, 2014; Scott Ilgerfritz, Immediate Past-President,
Public Investors Arbitration Bar Association, dated March 11, 2014;
Mark Kosanke, President, Real Estate Investment Securities
Association, dated March 12, 2014; Thomas Price, Managing Director,
Securities Industry and Financial Markets Association, dated March
12, 2014; David Hirschmann, President and CEO, U.S. Chamber of
Commerce, Center for Capital Markets Competitiveness, dated March
12, 2014; and Jacob Frydman, Chairman and CEO, United Realty Trust
Incorporated, dated March 12, 2014. Comment letters are available at
www.sec.gov.
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[[Page 42591]]
On March 14, 2014, FINRA extended the time period in which the
Commission must approve the proposed rule change, disapprove the
proposed rule change, or institute proceedings to determine whether to
approve or disapprove the proposed rule change to May 20, 2014.
On May 20, 2014, the Commission issued an order instituting
proceedings pursuant to Section 19(b)(2)(B) of the Act \5\ to determine
whether to approve or disapprove the proposed rule change. The order
was published for comment in the Federal Register on May 27, 2014.\6\
The Commission received five (5) comment letters in response to the
order.\7\
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\5\ 15 U.S.C. 78s(b)(2)(B).
\6\ Exchange Act Release No. 72193 (May 20, 2014), 79 FR 30217
(May 27, 2014) (Order Instituting Proceedings to Determine Whether
to Approve or Disapprove a Proposed Rule Change Relating to Per
Share Estimated Valuations for Unlisted DPP and REIT Securities).
The comment period closed on June 26, 2014.
\7\ Letters to Elizabeth Murphy, Secretary, SEC, from David
Bellaire, Executive Vice President and General Counsel, dated June
26, 2014; Thomas Price, Managing Director, Securities Industry and
Financial Markets Association, dated June 26, 2014; Mark Kosanke,
President, Real Estate Investment Securities Association, dated June
26, 2014; Jason Doss, President, Public Investors Arbitration Bar
Association, dated June 25, 2014; and Kenneth Mills, dated June 24,
2014. Comment letters are available at www.sec.gov.
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On July 11, 2014, FINRA filed a letter responding to comments and
Amendment No. 1 to the proposed rule change.\8\ The text of Amendment
No. 1 is available on FINRA's Web site at http://www.finra.org, at the
principal office of FINRA, and at the Commission's Public Reference
Room. Amendment No. 1 is described in Item II below, which has been
substantially prepared by FINRA. The Commission is publishing this
notice to solicit comments on the proposed rule change, as amended,
from interested persons.
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\8\ Letter to Kevin O'Neill, Deputy Secretary, SEC, from Matthew
Vitek, Associate General Counsel, FINRA, dated July 11, 2014
(``Response Letter''). FINRA's Response Letter is available at
www.sec.gov.
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II. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Amendment
As further described in the Notice of Filing, FINRA is proposing to
amend (1) NASD Rule 2340 (Customer Account Statements) to modify the
requirements relating to the inclusion of a per share estimated value
for unlisted DPP and REIT securities on a customer account statement;
and (2) FINRA Rule 2310 (Direct Participation Programs) to modify the
requirements applicable to members' participation in a public offering
of unlisted DPP or REIT securities.
In response to comments received by the Commission, FINRA is
proposing to amend the proposed rule change as follows:
1. FINRA is revising proposed NASD Rule 2340(c) to require general
securities members to include in customer account statements a per
share estimated value for a DPP or REIT security developed in a manner
reasonably designed to ensure that the per share estimated value is
reliable. Thus, FINRA is eliminating the voluntary or ``not priced''
option originally proposed. Moreover, FINRA is revising proposed NASD
Rule 2340(c)(1) to state that the per share estimated value will be
deemed to have been developed in a manner reasonably designed to ensure
that it is reliable if the member uses one of the two specified
methodologies.
2. FINRA is eliminating the ``no reason to believe that the per
share estimated value is unreliable'' standard from the general
provision in proposed NASD Rule 2340(c). As revised, proposed NASD Rule
2340(c) would require disclosure of valuations and proposed NASD Rule
2340(c)(1) would deem valuations calculated under the two defined
methodologies to have been developed in a manner reasonably designed to
ensure that they are reliable. As a result, FINRA believes the ``no
reason to believe that the per share estimated value is unreliable''
standard in the general provision in proposed NASD Rule 2340(c) is not
necessary.
3. FINRA is removing the ``over distribution'' deduction from the
per share estimated value in the ``net investment'' methodology in
proposed NASD Rule 2340(c)(1)(A)(ii) and replacing it with enhanced
disclosure of ``over distribution'' on customer account statements. As
revised, proposed NASD Rule 2340(c)(2)(A) would require account
statements that include a ``net investment'' per share estimated value
for a DPP or REIT security to disclose, if applicable, prominently and
in proximity to disclosure of distributions and the per share estimated
value the following: ``IMPORTANT--Part of your distribution includes a
return of capital. Any distribution that represents a return of capital
reduces the estimated per share value shown on your account
statement.''
4. FINRA is revising the ``net investment'' methodology in proposed
NASD Rule 2340(c)(1)(A) to make clear that firms may use the maximum
offering percentage when the issuer provides a range of amounts
available for investment unless the member has reason to believe that
such percentage is unreliable, in which case the member must use the
minimum offering percentage.
5. FINRA is modifying the ``net investment'' methodology in
proposed NASD Rule 2340(c)(1)(A) to lengthen the time period in which
members may use the ``net investment'' methodology. The proposed rule
change, as amended, would allow ``net investment'' values to be
included on customer account statements at any time before 150 days
following the second anniversary of breaking escrow. FINRA is making a
parallel change to proposed FINRA Rule 2310(b)(5)(B)(i).
6. FINRA is modifying proposed FINRA Rule 2310(b)(5)(B) to clarify
issuer disclosure requirements, including the elimination of the
requirement to identify the service used to obtain a valuation, and
require more frequent valuations. As revised, proposed FINRA Rule
2310(b)(5)(D)(i) would require that the per share estimated value be
based on valuations of the assets and liabilities of the DPP or REIT
performed at least annually by, or with the material assistance or
confirmation of, a third-party valuation expert or service.
7. FINRA is modifying proposed FINRA Rule 2310(b)(5) to
specifically except DPPs that are subject to the Investment Company Act
of 1940 (``1940 Act'') from the requirements under the rule in
recognition that business development companies that fall under the
definition of DPP are subject to an existing regulatory framework under
the 1940 Act for determining and publishing net asset value on a
regular basis. In addition, FINRA is revising proposed NASD Rule
2340(c)(1)(B) to state, in the case of DPPs subject to the 1940 Act,
the appraised value methodology under Rule 2340(c)(1)(B) shall be
consistent with the valuation requirements of the 1940 Act and the
rules thereunder.
8. FINRA is extending the effective date of the proposed rule
change to no earlier than 18 months following Commission approval.
FINRA believes this extended timeframe will give industry participants
time to make adjustments to product structures and any necessary
operational changes.
FINRA is also proposing the following changes:
[[Page 42592]]
1. FINRA is proposing to change the title of NASD Rule 2340(c) from
``Unlisted DPP/REIT Securities'' to ``DPP and Unlisted REIT
Securities'' to more accurately reflect the types of securities that
are subject to the rule. FINRA also is changing the title of proposed
NASD Rule 2340(c)(1)(B) from ``independent valuation'' to ``appraised
value'' to more accurately reflect the per share estimated value
methodology.
2. FINRA is revising the ``net investment'' methodology in proposed
NASD Rule 2340(c)(1)(A)(i) to clarify that ``another equivalent
disclosure'' means ``another equivalent disclosure that reflects the
estimated percentage deduction from the aggregate dollar amount of
securities registered for sale to the public of sales commissions,
dealer manager fees, and estimated issuer offering and organization
expenses.''
3. FINRA is modifying the ``appraised value'' methodology to
clarify in proposed NASD Rule 2340(c)(1)(B) that the member may include
a per share estimated value reflecting an appraised valuation disclosed
in the Issuer Report based on the valuations of the assets and
liabilities of the DPP or REIT performed at least annually by, or with
the material assistance or confirmation of, a third-party valuation
expert or service and derived from a methodology that conforms to
standard industry practice.
4. FINRA is eliminating the required disclosures in proposed NASD
Rule 2340(c)(2)(A)(i) regarding characteristics of the per share
estimated value and proposed NASD Rule 2340(c)(2)(B) on the ``not
priced'' option. FINRA believes that streamlined disclosure will be
more effective than also requiring an account statement to describe per
share estimated value, its source, and the method by which it was
developed, as would have been required under the originally proposed
NASD Rule 2340(c)(2)(A)(i). In addition, FINRA believes the disclosures
in proposed NASD Rule 2340(c)(2)(B) are no longer necessary because the
revised proposal requires a general securities member to include in a
customer account statement a per share estimated value of a DPP or REIT
security.
5. FINRA is modifying proposed FINRA Rule 2310(b)(5) to state that
a member shall not participate in a public offering of the securities
of a DPP that is not subject to the requirements of the 1940 Act or of
a REIT unless they meet the requirements under the rule. In addition,
FINRA is revising proposed FINRA Rule 2310(b)(5)(A) to clarify that the
issuer of the DPP or REIT must agree to disclose a per share estimated
value of the DPP or REIT security, developed in a manner reasonably
designed to ensure it is reliable, in the DPP or REIT periodic reports
filed pursuant to Section 13(a) or 15(d) of the Exchange Act.
6. FINRA is clarifying in proposed FINRA Rule 2310(b)(5)(D)(iii)
that the valuation must be accompanied by a written opinion or report
by the issuer, delivered at least annually to the broker-dealer, that
explains the scope of the review, the methodology used to develop the
valuation or valuations, and the basis for the value or values
reported.
7. FINRA is making a technical change to delete FINRA Rule
5110(f)(2)(L) instead of the originally proposed deletion of FINRA Rule
5110(f)(2)(M) because FINRA renumbered the subparagraphs of FINRA Rule
5110(f)(2) after the filing of the proposed rule change.\9\
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\9\ See Exchange Act Release No. 72114 (May 7, 2014), 79 FR
27355 (May 13, 2014) (Order Approving a Proposed Rule Change; SR-
FINRA-2014-004).
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III. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change, as amended by Amendment No. 1, is consistent with the Act.
Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-FINRA-2014-006 on the subject line.
Paper Comments:
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2014-006. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available
for inspection and copying at the principal office of FINRA. All
comments received will be posted without change. The Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly.
All submissions should refer to File Number SR-FINRA-2014-006 and
should be submitted on or before August 12, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-17150 Filed 7-21-14; 8:45 am]
BILLING CODE 8011-01-P