ADISA Submits Comment Letter Regarding Proposed Amendment to the NASAA Statement of Policy Regarding REITs

Sep 13, 2016

ADISA has submitted a comment letter in response to the North American Securities Administrators Association’s (NASAA) request for public comment on a proposed amendment to its Statement of Policy Regarding Real Estate Investment Trusts (known as the REIT Guidelines).
The proposed amendment to the REIT Guidelines proposes a uniform ceiling on an investor’s exposure to non-traded REITs and affiliates – a so-called “concentration limit.” If adopted, it would establish a general ceiling of ten percent (10%) of an investor’s “liquid net worth,” subject to some important exceptions.
ADISA, on behalf of its members, does not support the proposed amendment, and requested that NASAA either withdraw the amendment or re-work it to create a more flexible approach that better recognizes the investing community’s need for, and interest in, diversified investment portfolios. ADISA surveyed its membership to gauge its reaction to the proposed amendment. According to ADISA Executive Director/CEO, John Harrison, the survey results allowed ADISA’s Legislative & Regulatory Committee to judge and formulate a consensus response.
ADISA’s fundamental concerns with the Proposed Amendment are focused on the following areas:

  1. A “one size fits all” approach, even with an exception for accredited investors, simply does not take into account each individual investor’s circumstances and the responsibilities of his or her financial advisor to determine the optimal mix of investments for that individual investor’s portfolio.
  2. While the proposed amendment suggests a uniform concentration limit, each state administrator can use any of fourteen listed qualitative and quantitative factors to modify the concentration standard for any given program.
  3. The inclusion of the term “affiliate” in the amendment has the potential to create a different limit for each program subject to the REIT Guidelines, as the term is very broad and may cause various other programs and entities to be included in the proposed concentration limit.
  4. Using an investor’s “liquid net worth” for purposes of calculating his or her maximum exposure to non-traded REITs is not an appropriate metric, as it incorrectly links an investor’s ability to invest in these programs to his or her separate decision regarding the level of liquidity the investor maintains for various and possibly wholly unrelated reasons.
The proposed amendment included several new, constructive elements, and the ADISA letter acknowledges them. On the whole, however, ADISA’s membership does not believe that the suggested approach serves investors well and should not be adopted as proposed. Follow-up meetings with NASAA to discuss ADISA’s concerns and to help create appropriate protections for investors in non-traded REITs were offered.
The letter, signed by ADISA President Mike Bendix of DFPG Investments, was drafted by Deborah Froling, a partner with Kutak Rock LLP, with assistance from John H. Grady, ADISA President-Elect and Legislative & Regulatory Committee Chair, of DLA Piper LLP.
ADISA wishes to acknowledge the constructive dialogue that its Legislative & Regulatory Committee had with senior officials at the Investment Program Association and the Financial Services Institute. Both of these organizations submitted comment letters that bring forth informed and helpful perspectives and commentary on the proposed amendment. ADISA believes that NASAA should appreciate the degree to which associations that support financial advisors and the direct participation program industry generally are working collectively and constructively on issues that are vital to investors and their advisors.
Read the letter in its entirety here.