FINRA Issues Notice on How Illiquid Non-Traded REITs are Valued on Customer Statements

The David Lerner Associates debacle has caused the Financial Industry Regulatory Authority (FINRA) to focus on how broker-dealers show the value of illiquid investments like non-traded REITs on their customers’ monthly statements, according to Investment News. For years, the shares of Apple REITs that were underwritten and sold by David Lerner Associates were constantly valued at $11 on customer statements, notwithstanding the volatility in the marketplace over the last several years. FINRA complained that Lerner was misleading investors about the true value of the product and subsequently account statements indicated that the shares were “not priced.”

In general, private placements and non-traded REITs are sold through independent broker dealers, in an industry that has seemingly exploded with the number of REIT investment vehicles quadrupling over the last ten years. Consequently, FINRA has focused on the products and issued a regulatory notice proposing how illiquid securities would be valued on customer statements. For example, FINRA has issued a notice to broker dealers telling them that they cannot use data more than 18 months old to estimate the value of the non-traded REITs after concluding their offerings. Previously, broker dealers had listed the value of non-traded REITs at par value, or the price they were when sold to the public. This way of valuing shares came under much scrutiny after the financial and housing crisis of 2008, when many non-traded REITs that were invested in commercial real estate stopped dividends and limited redemptions to investors.

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