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Bates Research  |  09-19-22

Seeking to Integrate Reg BI Standards, NASAA Proposes Revisions to REITs and Other Guidelines

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At summer’s end, the North American Securities Administrators Association, Inc. (“NASAA”) reminded financial professionals that state regulators remain a force to be reckoned with in an increasingly complex financial marketplace. Describing a need to protect elderly investors from unsuitable products, a need to protect average investors from the risks of confusing contract terms and misleading marketing communications, and to address ongoing and persistent complaints of fraud, NASAA proposed revisions to its Guidelines on Real Estate Investment Trusts (“REITs”). The regulation of publicly offered REITs that do not list their securities on a stock exchange (“non-traded REITs”) is not preempted by federal law and remains subject to substantive state securities law and state registration requirements. The proposed guidelines will be closely watched for the potential to add additional stringent requirements to existing federal regulations on financial professionals and complex products. 

Proposed Revisions

On July 12, 2022, NASAA requested public comment on amending its 2007 policy on REITs. The comment deadline on the proposal closed on September 12, 2022. The revisions have been in the works for several years—the latest set focuses on four updates.

The first proposed change would revise the standards of conduct applied to financial professionals that recommend or offer non-traded REITs to retail investors. These revisions would update the guidelines for brokers by enhancing the suitability standard to match the SEC’s Regulation Best Interest (“Reg BI”) standard. The guidelines keep the suitability section as “applicable when recommendations are made to non-retail customers.” NASAA recognized that REIT programs have been offered through investment advisers, “although still somewhat less popularly than through brokers.” The new guidelines would specifically prohibit indemnification to associated persons, investment advisers, or investment adviser representatives for violations of federal or state laws.

The second proposed change would adjust the net income and net worth required for investors. These adjustments are based on inflation, but the proposal requires REIT investors to have either (a) the combination of a minimum annual gross income of $95,000 and a minimum net worth of $95,000 or (b) a minimum net worth of $340,000.

The third proposed change would set a standardized concentration limit which would prohibit a total investment in the issuer that exceeds 10% of the investor’s liquid (cash, cash equivalents, and marketable securities) net worth. The new guidelines would impose the 10 percent concentration limit on the issuer, its affiliates, and other non-traded direct participation programs. NASAA stated that the concentration limit “accomplishes the goal of diversification to reduce the risk of loss from a single investment or single investment type.”

The fourth proposed change would prohibit REIT sponsors from making distributions from gross proceed distributions. (Within the REIT industry, NASAA states, it is relatively common—albeit “controversial”—for sponsors to market REITs as income-producing, and then to use investor proceeds from such offerings to fund cash distributions.) NASAA argues that the practice is potentially confusing and deceptive for investors, because “these are not liquidating distributions, but rather are distributions performed while simultaneously raising capital in the non-traded REITs offering to create the phantom ‘yield’ that was promised.”

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Impact on Other Guidelines

The proposed revisions to the REIT guidelines have implications for other NASAA guidelines under development. NASAA stated it is engaged in updates to its “Omnibus Guidelines, Asset-Backed Securities, Commodity Pools, Equipment Leasing, Mortgage Programs and Real Estate Programs (other than REITs),” as well as a “proposal for inaugural guidelines applicable to business development companies.” Integrating the Reg. BI standard into the guidelines while keeping the suitability standard present familiar compliance challenges. NASAA’s first report on Reg BI compliance raised many concerns. Should the proposed REIT requirements concerning concentration limits, net worth and income be imposed on other products regulated by states, compliance on recommendations could get exceedingly complicated.

The proposed guidelines have a long way to go before they are complete and face another long process before states adopt them. Bates will keep you apprised.

How Bates Can Help:

Bates Group’s experts offer consulting and testifying expert testimony. including for REITs, Reg BI and suitability. Find an expert today with our online Expert Search, or visit our Financial Securities Litigation & Consulting and Damages and Analysis services to support your net case ..

Contact us at or call 503-670-7772 to learn how we can support your team and your clients.