Securities Lawyers Blog
FINRA has recently proposed a rule change that would amend the procedures for valuing Direct Participation Programs (DPPs) and Real Estate Investment Trusts (REITs). The rule change is intended to provide greater clarity to investors concerning the value of these investments, an extremely contentious issue.
A REIT is a security that invests in different types of real estate such as commercial properties, home mortgages, or other specialty niche real estate markets (e.g., golf courses, malls, hotels). REITs can be publicly traded or privately held. Publicly traded REITs can be sold on an exchange and have the liquidity traditional associated with other liquid stocks and bonds. Non-traded REITs are sold only through broker-dealers and are illiquid.
Increased volatility in the stock market in recent years led some investment advisors to increasingly recommend REITs as a purported stable investment during unstable times. However, claims of stable REITs have been shown to be false. The stability of non-traded REITs only exists because brokerage firms and issuers have control over the value of the security listed on an investor’s account statements and not because the security will actually sell at that value or is stable over time.