FINRA is looking to change NASD Rule 2340, Customer Account Statements, to address the way per share estimated values for unlisted Direct Participation Programs ("DPPs") and unlisted Real Estate Investment Trusts ("REITs") are reported on customer account statements. FINRA first introduced rule changes last September, in Regulatory Notice 11-44.  Based on comments submitted, FINRA has believes further changes are in order, which it now presents in Regulatory Notice 12-14. FINRA asks that interested persons review the release and submit any comments on or before 4/11/12. Generally speaking, FINRA seeks to proposed these additional revisions to NASD Rule 2340 - that are explained in greater detail later in the post:

• General securities members no longer would be required to provide a per share estimated value, unless and until the issuer provides an estimate based upon an appraisal of assets and liabilities in a periodic or current report filed under the Securities Exchange Act of 1934 ("SEA '34)".
• During the initial offering period, member firms would have the option of using a modified net offering price or designating the securities as “not priced.”
• Account statement disclosures that accompany the per share estimated value would be revised.
• Alternative requirements for DPPs or REITs would also be available to member firms for calculation of a daily net asset value ("NAV").

Background Discussion. Rule 2340 generally requires each general securities member firm to send account statements to customers at least quarterly, and such statements must include a description of any securities positions, money balances and account activity since the firm issued the prior account statement.

A firm that doesn't carry customer accounts and does not hold customer funds or securities is not a general securities member firm and is not subject to the provisions of NASD Rule 2340.

It  further should be noted that DPPs and REITs are the only securities identified in NASD Rule 2340 for which per share estimated account values are required on an account statement.

As per Rule 2340(c), statement must include a per share estimated value for a DPP or REIT security held whenever a value appears in the issuer’s annual report.  Firms may use the estimated value from the annual report for statement reporting purposes of - as well as an independent valuation service or any other source - so long as the data is not more than 18 months old. If a firm believes, and can demonstrate, that the estimated value is incorrect or no longer accurate as of the date of valuation, then the firm may remove or amend the estimated value from the customer statements. As Proposed, FINRA would eliminate ... the requirement from NASD Rule 2340 that a member firm include a per share estimated value for a DPP or REIT security held in a customer’s account whenever any value appears in the issuer’s annual report.  Instead, FINRA would require that a firm provide a per share estimated value based upon an appraisal from the issuer’s most recent periodic or current report. While the proposal would not require the presentation of net offering price, it would permit firms to present net offering price (modified as described in the Notice) until an appraised value appears in the issuer’s periodic or current reports, but in no event after the 2nd quarterly public filing following the initial offering period.  An appraised value during most of the initial offering period would not be as useful to investors because most of the assets in the program will typically consist of cash and short-term, liquid securities. This quarterly filing “grace period” is designed to ensure that issuers have had sufficient time to conduct an appraisal and include an appraised value after the initial offering period. Moreover, a quarterly public filing deadline might occur immediately after the initial offering period, and for this reason the proposal would allow firms to present the net offering price until the issuer has filed one more quarterly filing, unless the issuer includes an appraised value in its periodic or current reports before that time. During the period in which the issuer has not provided an appraised value (but extending no longer than the second quarterly filing after the initial offering period) a member may present a modified version of net offering price or list the securities as “not priced.” To address some of the practical limitations of calculating a net price, FINRA would redefine “net offering price” as: the gross offering price less any front-end underwriting compensation expenses (as defined in Rule 2310(b)(4)(c)(ii)) reimbursed or paid for with offering proceeds. As such, firms would not be required to subtract either issuer expenses, due diligence expenses, or trail fees, unlike the original proposal. Simplifying the methodology to arrive at a net offering price should ease the burdens on firms electing to use that figure. Account Disclosures. NASD Rule 2340 requires that when a per share estimated value is provided on an account statement, firms must make certain disclosures pertaining to the illiquid nature of these securities and the source of the estimated net asset value. FINRA would augment and refine these disclosures to assist investors in understanding them.

• First, FINRA would require disclosure that the value and the methodology by which a per share estimated value has been determined should apply only to the net offering price that may appear before the issuer provides an appraised value.
• Second, FINRA would replace the terms “illiquid” and “liquidity” with terms more likely to be familiar to ordinary investors.
• Third, FINRA would include disclosures that direct customers to the issuer for information on redemption and the per share estimated value.

Specifically, FINRA proposes that a general securities firm disclose:

• that the per share estimated value is being reproduced from the issuer’s public filings with the SEC and is being presented without inquiry or investigation;
• the methodology by which any net price is calculated;
• that no public market currently exists for the securities, and even if the customer is able to sell these securities, the value the customer receives may be less than the per share estimated value reflected on the statement; and,
• that additional information about redemption options and the per share estimated value reflected on the statement is available from the issuer.

FINRA Staff Contacts. Direct questions to:   Thomas Selman, EVP, Regulatory Policy - (202) 728- 6977;  Joseph Price, SVP, CorpFin/Advertising Regs. - (240) 386-4623; or  Gary Goldsholle, VP and Assoc GC, Office of the General Counsel - (202) 728-8104. For further details, go to:   [FINRA RegNote 12-14, March 2012].