NASAA Wants to Align REIT Policy With Reg BI

Under federal law, Coverman said, “NAV REITs may be sold to any retail investor, subject to a broker-dealer or investment adviser’s determination that they are suitable for the customer. NASAA would cut out many investors.”

NASAA’s plan, Coverman argued, “would do this in two fundamental ways. First, it would limit purchases to investors who meet net worth and gross income tests. Second, it would limit the ability of investors to hold more than a certain percentage of their liquid net worth in these products. Neither requirement is imposed by the SEC or FINRA because these are publicly registered securities, and the broker-dealers and investment advisers who recommend them already must act in the customer’s best interest.”

Other revisions being proposed include:

adding a new standardized concentration limit to the suitability section; and
adding a new prohibition against using gross offering proceeds as an investment objective or strategy to make distributions.

A recent NASAA report, the proposal explains, ”indicates that many broker-dealer firms have not materially changed their policies, procedures, or practices regarding the sale of non-traded REITs or other complex, costly, and risky products to retail investors since the passage of Reg BI notwithstanding the enhanced care, disclosure, and conflict of interest obligations mandated by the rule.”

The NASAA report also noted, the group said, “that firms recommending non-traded REITs, moreover, had the highest concentration of harmful compensation conflicts of any of the complex, costly, risky products that were recommended by firms examined in the state initiative post-Reg BI.”

NASAA states in the proposal that it has advocated inflationary adjustments in the accredited investor context for purposes of Regulation D, for which figures have not been updated since 1982.

Adjusting the figures with the U.S. Bureau of Labor Statistics Consumer Price Index for All Urban Consumers, purchasers of these securities must have either (a) the combination of a minimum annual gross income of $95,000 and a minimum net worth of $95,000 or (b) a minimum net worth of $340,000.

“The current figures (adopted in 2007) specify the combination of a minimum net income of $70,000 and minimum net worth of $70,000 under (a) or the minimum net worth of $250,000 under (b),” the proposal states.