More Detailed Guidance on Real Estate Communications

FINRA RN 13-18 provides new guidance on communications with the public concerning non-traded REITs and DPPs. The notice was drafted by the FINRA advertising department and likely brings to a conclusion an extended series of recent FINRA reviews of industry marketing materials. A summary is below.

The Regulatory Notice is effectively an interpretation of FINRA Rule 2210, which requires that FINRA member communications with the public be "fair, balanced and not misleading." (For a general discussion of the requirements applicable to broker-dealer communications, see Lofchie's Guide to Broker-Dealer Regulation, Communications Chapter.)

Disclosure Issues

Communications must be consistent with representations in the current prospectus.

• Cannot imply real estate or assets owned by the program are direct investments.
• If a REIT has not qualified as a REIT for tax purposes, communications should disclose that the real estate program may not qualify.
• When benefits are discussed, risks must be discussed as well and not relegated to either footnotes or separate documents. The risks must be disclosed in EACH communication with the public.

Distribution Rates

Real estate program communications often include distribution rates. This is permissible if it is disclosed that:

• Payments are not guaranteed and may be modified;
• A breakdown of the components of distribution is provided;
• Time period when distributions are funded by return of principal; borrowings, and any other sources;
• If distributions are funded by return on principal the program will have less money to invest; and
• The distribution rate may not be sustainable.

In order to satisfy the fair and balanced requirement of Rule 2210, relevant communications may not include an annualized distribution rate until a program has paid distributions that are, "on an annualized basis, at a minimum equal to that rate for at least two consecutive full quarterly periods."

Additional Guidance

• Stability and volatility claims - must provide a sound basis for evaluating facts;
• Redemption features and liquidity events - cannot omit any material fact or qualification;
• Performance of prior related real estate programs - information may not be "cherry-picked";
• Use of indices and comparisons - differences must be disclosed;
• Pictures of specific properties - disclose that "property is owned by an investment managed by the sponsor and not the program"; and
• Capitalization rates - must be based on the prospectus and disclose method of calculation.

See: FINRA Reg. Notice 13-18.See also: FINRA Rule 2210 (Communications with the Public).Questions in regard to the Notice may be directed to Martin Hewitt, a consulting attorney with Cadwalader. Email: [email protected], Phone: 212.504.6342