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May 20, 2014.
On January 31, 2014, the Financial Industry Regulatory Authority, Inc. (“FINRA”) (f/k/a National Association of Securities Dealers, Inc. (“NASD”)) filed with the Securities and Exchange Commission (“SEC” or “Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) 
and Rule 19b-4 thereunder,
a proposed rule change to amend provisions in the NASD and FINRA rulebooks addressing per share estimated valuations for unlisted direct participation program (“DPP”) and real estate investment trust (“REIT”) securities. The proposed rule change was published for comment in the Federal Register on February 19, 2014.
The Commission received eighteen (18) comment letters in response to the proposed rule change.
On March 14, 2014, FINRA extended the time period in which the Commission must approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to approve or disapprove the proposed rule change to May 20, 2014. The Commission is publishing this order to institute proceedings pursuant to Section 19(b)(2)(B) of the Act 
to determine whether to approve or disapprove the proposed rule change.
Institution of proceedings does not indicate that the Commission has reached any conclusions with respect to the proposed rule change, nor does it mean that the Commission will ultimately disapprove the proposed rule change. Rather, as discussed below, the Commission seeks additional input from interested parties on the issues presented by the proposal.
II. Description of the Proposed Rule Change
NASD Rule 2340 (Customer Account Statements)
NASD Rule 2340 generally requires that general securities members 
provide periodic account statements to customers, on at least a quarterly basis, containing a description of any securities positions, money balances or account activity since the last statement. As further described in the Notice of Filing, FINRA proposes to amend NASD Rule 2340 to eliminate the requirement contained in paragraph (c) that a general securities member disclose in a customer's account statement a per share estimated value of the customer's unlisted DPP or REIT securities holdings, provided that such a value is reflected in the DPP's or REIT's annual report. Thus, under the proposal, a general securities member would no longer be required to include a per share estimated value for an unlisted DPP or REIT security in a customer account statement, but any member may do so if the value has been developed in a manner reasonably designed to ensure that it is reliable, the member has no reason to believe that it is unreliable, and the account statement includes certain disclosures. FINRA proposes two methodologies under which an estimated value would be presumed to have been developed in a manner reasonably designed to ensure that it is reliable: (1) The net investment methodology; and (2) the independent valuation methodology.
The net investment methodology would reflect the “net investment” disclosed in the issuer's most recent periodic or current report. The “net investment” would be based on the “amount available for investment” percentage in the “Estimated Use of Proceeds” section of the offering prospectus or, where “amount available for investment” is not provided, another equivalent disclosure.
The per share estimated value also must deduct the portion, if any, of cumulative distributions per share that exceeded Generally Accepted Accounting Principles (“GAAP”) net income per share for the corresponding period, after adding back depreciation and amortization or depletion expenses. Moreover, the deduction for each distribution would be limited to the full amount of the distribution.
The independent valuation methodology would consist of the most recent valuation disclosed in the issuer's periodic or current reports. It would also require that a third-party valuation expert or experts determine, or provide material assistance in the process of determining, the valuation.
FINRA Rule 2310 (Direct Participation Programs)
FINRA Rule 2310 generally provides that no member is permitted to participate in a public offering of DPP or REIT securities unless the general partner or sponsor will disclose in each annual report distributed to investors Start Printed Page 30218pursuant to Section 13(a) of the Act: (1) A per share estimated value of the securities; (2) the method by which the estimated value was developed; and (3) the date of the data used to develop the estimated value.
As further described in the Notice of Filing, FINRA proposes to amend FINRA Rule 2310 to provide that a member may not participate in a public offering of a DPP or REIT security unless: (A) A per share estimated value is calculated on a periodic basis in accordance with a methodology disclosed in the prospectus, or (B) the general partner or sponsor has agreed to disclose in the first periodic report filed pursuant to Section 13(a) or 15(d) of the Act after the second anniversary of breaking escrow: (1) A per share estimated value of the DPP or REIT calculated by, or with the material assistance of, a third-party valuation expert; (2) an explanation of the method by which the per share estimated value was developed; (3) the date of the valuation; and (4) the identity of the third-party valuation expert used. In addition, the general partner or sponsor of the DPP or REIT must have agreed to ensure that the valuation is conducted at least once every two years; is derived from a methodology that conforms to standard industry practice; and is accompanied by a written opinion to the general partner or sponsor of the DPP or REIT that explains the scope of the review, the methodology used to develop the valuation, and the basis for the per share estimated value.
III. Summary of Comments
While the commenters to the Notice of Filing generally expressed support for the goals of the proposed rule change, they raised a number of concerns regarding various aspects of the proposal. For instance, several commenters opposed the deduction of offering and organizational costs from the share price under the net investment methodology, citing difficulties in accurately determining those expenses.
A number of commenters also opposed the net investment methodology's deduction of “over-distributions” from the share value, arguing, among other things, that such a requirement was unprecedented and would have severe implementation challenges, as well as unintended negative consequences, such as actually reducing the level of investor understanding regarding the sources of distributions.
Many commenters opposed the elimination of any requirement to include a per share valuation of unlisted DPP or REIT securities in customer account statements. Commenters stated that FINRA, in its proposal, put forth two valuation methodologies that it deems presumptively reliable, and allowing an unlisted DPP or REIT security to nevertheless be shown as “not priced” in customer account statements would deprive investors of useful information and be viewed as a retreat from a policy of transparency.
In addition, some commenters raised concerns about the proposed rule change's anticipated implementation period.
These commenters favored a longer period in order to minimize investor confusion and avoid market disruption as the industry develops the appropriate controls and procedures to comply with the rule.
Commenters further questioned, among other things, the timing of the initiation of valuations for unlisted DPP and REIT securities under FINRA Rule 2310; 
the frequency with which valuations are estimated under FINRA Rule 2310; 
the effect of the proposed rule change on business development companies and daily NAV REITs; 
and the lack of an economic analysis.
On May 16, 2014, FINRA noted that it is still considering the points raised by commenters and anticipates filing an official response in the near future.
IV. Proceedings To Determine Whether To Approve or Disapprove SR-FINRA-2014-006 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section 19(b)(2)(B) of the Act to determine whether the proposed rule change should be approved or disapproved.
Institution of such proceedings appears appropriate at this time in view of the legal and policy issues raised by the proposal. As noted above, institution of proceedings does not indicate that the Commission has reached any conclusions with respect to any of the issues involved. Rather, the Commission seeks and encourages interested persons to comment on the issues presented by the proposed rule change and provide the Commission with arguments to support the Commission's analysis as to whether to approve or disapprove the proposal.
Pursuant to Section 19(b)(2)(B) of the Act,
the Commission is providing notice of the grounds for disapproval under consideration. In particular, Section 15A(b)(6) of the Act 
requires, among other things, that FINRA rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. In addition, Section 15A(b)(9) of the Act 
requires that FINRA rules not impose any unnecessary or inappropriate burden on competition.
The Commission believes FINRA's proposed rule change raises questions as to whether it is consistent with the requirements of Section 15A(b)(6) and 15A(b)(9) of the Act.
V. Request for Written Comments
The Commission requests that interested persons provide written submissions of their views, data, and arguments with respect to the issues raised by the proposed rule change. In particular, the Commission invites the written views of interested persons concerning whether the proposed rule change is inconsistent with Sections 15A(b)(6) and 15A(b)(9), or any other provision, of the Act, or the rules and regulations thereunder.
Although there do not appear to be any issues relevant to approval or disapproval which would be facilitated by an oral presentation of views, data, and arguments, the Commission will consider, pursuant to Rule 19b-4, any request for an opportunity to make an oral presentation.
Interested persons Start Printed Page 30219are invited to submit written data, views, and arguments by June 26, 2014 concerning whether the proposed rule change should be approved or disapproved. Any person who wishes to file a rebuttal to any other person's submission must file that rebuttal by July 11, 2014. Comments may be submitted by any of the following methods:
- Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2014-006. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principle office of FINRA. All comments received will be posted without change. The Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make publicly available.
All submissions should refer to File Number SR-FINRA-2014-006 and should be submitted on or before July 11, 2014. If comments are received, any rebuttal comments should be submitted by July 11, 2014.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Kevin M. O'Neill,
[FR Doc. 2014-12072 Filed 5-23-14; 8:45 am]
BILLING CODE 8011-01-P