For nearly two years, the Financial Industry Regulatory Authority (FINRA) has been working on revisions to Rule 2340 which would change how brokerage firms value per-share REITs on client account statements. According to Investment News, FINRA proposed to two options on how brokerage firms could use to report per-share estimated value.
“In the first scenario, a broker-dealer simply would not be required to include a per-share estimated value of an unlisted private placement or REIT in a customer account statement.
In a second, a broker-dealer could rely on a valuation if done by one of three methods: an independent, outside valuation service performed at least once every three years; a valuation handled by any service conducting valuations according to a methodology disclosed in the prospectus; or, for two years after first investing, a “net investment,” valuation that consisted of the offering price minus cash distributions to investors, and “organization and offering expenses” funded through borrowing or offering proceeds. ”
This is a step in the right direction. Currently, the value reported for a REIT can remain the same for many years, despite the actual performance of the REIT. The first scenario, which excludes per-share estimated vales on clients account statements, would help prevent investor from having a false sense of security.
The various options available with scenario two would require the per-share estimated value to be updated every two to three year, and would take expenses and other costs into consideration. Ultimately, this would provide clients with a more accurate value of their investment.
The White Law Group has been following FINRA’s regulation proposal for nearly two years (here) and will continue to provide updates on all regulation changes that aim to protect investors.