The Financial Industry Regulatory Authority is postponing when it will send to the U.S. Securities and Exchange Commission its proposed new rules that would give investors a more accurate overview of the costs involved in buying nontraded real estate investment trust shares. The proposed change to NASD Rule 2340, if approved by the SEC, would no longer allow brokerage firms to list a nontraded REIT’s per-share value at the common price of $10, which is the price that they are sold to clients.
Instead, the different fees and commissions that deal managers and brokers are paid would have to be factored in, which would lower each nontraded REIT’s share price in a customer’s account. Independent brokerage firms and their affiliated reps are the ones that would be most affected since practically all they sell is nontraded REITs. Unlisted private placements would also be impacted.
Although the comment period on the proposed rule changes ended in March, FINRA now says that it is not yet done looking at these comments. One group, the Investment Program Association, wants the proposed rule changes—in particular, the one that modifies to the way REIT valuations show up on client statements—delayed until 2015 so that nontraded REIT sponsors and brokerage firms that sell these investments have enough time to make their modifications so they are in compliance.
The SEC recently approved another rule change. This one will limit-self trading. FINRA Rule 5210 will mandate that firms implement procedures and policies that are reasonably designed to review trading activity and prevent self-trading from orders coming from a trading desk or algorithm. Self-trades raise concerns because they may not be a sign of real trading interest.
In other FINRA news, the SRO is modifying the design of Cards, its trading-surveillance system. The changes will give smaller brokers that don’t work with clearing firms greater flexibility to send commission and trade information either straight to FINRA or with the help of a contractor.
Cards is supposed to automate the SRO’s analysis of suspect broker activity, decreasing the agency’s dependence on live exams, which don’t always catch all violations. However, there were those who had problems with Cards, noting it would bring up data-security risks and privacy risks not just for brokers and investors. Big expenses over compliance could also be likely.
In a speech earlier this month, FINRA Chief Executive Officer Rick Ketchum said that based on meetings with brokerage firms to comprehend the benefits and costs of Cards, the agency has modified its original concept, including offering flexibility in data reporting to address cost complaints. The changes will be incorporated into a proposal to be issued this summer.
Our REIT Fraud lawyers represent investors seeking to recoup their losses.
Finra holds off sending nontraded REIT share price rule to SEC, InvestmentNews, May 20, 2014
FINRA Rule Change to Limit Self-Trading Approved, FINRA, May 2, 2014
Finra Trade-Surveillance System to Be Revised, Ketchum Says, Bloomberg, May 20, 2014
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SEC Roundup: The Regulator Charges Ex-Deloitte Chief Risk Officer with Auditor Rule Violations, Ex-Clearing Firm Officials With Regulation SHO Violations, & Rafferty Capital Markets with Illegal Trade Facilitation, Institutional Investor Securities Blog, May 23, 2014
SEC Warns About Investment Scams Involving Marijuana, Stockbroker Fraud Blog, May 24, 2014
AIG Wants to Stop Former CEO Greenberg From Naming It as a Defendant in Derivatives Lawsuit Against the US, Stockbroker Fraud Blog, April 13, 2013