Thursday, April 17th, 2014 and is filed under Uncategorized
FINRA’s Notice to Members 10-22 reminds broker dealers that while Regulation D may exempt a security from registration, it certainly does not provide exemptions from diligence requirements. In fact, because Reg D deals are private, firms should take additional precautions in discharging their obligations to perform a reasonable investigation.
When it comes to performing due diligence on Delaware Statutory Trusts (DSTs), broker dealers are wise to interpret FINRA’s use of “reasonable” to mean “comprehensive.”
In NTM 10-22, FINRA mentions several vital areas of inquiry when it comes to program sponsors, their management, and their business practices. Particularly in the case of DSTs, an inquiry can be an involved process. As with any other offering, a broker dealer needs to analyze the DST sponsor’s financial statements and operating history, as well as its business plans and relationships. That on its own is a major undertaking, but FINRA expects broker dealers to take due diligence on DSTs even further.
As part of verifying management representations of asset values, FINRA suggests a reasonable investigation might include a visit to the issuer’s properties. Per NTM 10-22, broker dealers are recommended to do the following:
“Visiting and inspecting a sample of the issuer’s assets and facilities to determine whether the value of assets reflected in the financial statements is reasonable and that management’s assertions concerning the condition of the issuer’s physical plants and the adequacy of its equipment are accurate.”
FactRight offers a comprehensive third party reporting solution to meeting DST due diligence demands––including physical site inspections.
In addition to reviewing appraisals, sales comps, and other data, FactRight engages real estate professionals to inspect the property, take pictures, and verify improvements and physical condition. This provides an additional layer of due diligence verification and documentation.
In addition, FactRight’s offering reports provide an executive summary of the program’s strengths and risks organized so that the issues that broker dealers spend the bulk of their due diligence effort on are addressed first in an easy-to-read, digest format.
FactRight also outlines pro forma and sensitivity analyses of the program and sponsor. The pro forma analysis discusses how the sponsor’s assumptions line up with industry norms and key data points, such as market and competitor data. Broker dealers gain a clear picture of a program’s risks through FactRight’s sensitivity analysis, in which we examine how the program would likely perform under pressure, such as the loss of a master lease.
With FactRight offering reports, broker dealers satisfy FINRA’s due diligence requirements concerning DSTs and other alternative investment products—and save time and money while doing so. For more information on FactRight’s third party reporting services, please contact us today.
Tuesday, April 1st, 2014 and is filed under Uncategorized
American Realty Capital Healthcare Trust intends to file an application to list its common stock on The NASDAQ Global Select Market under the symbol HCT. ARC Healthcare anticipates that its common stock will begin trading on April 7, 2014. In addition, ARC Healthcare plans a tender offer to purchase up to $150 million of its shares of common stock at a purchase price of $11.00 per share.
For more information, please see the following documents:
Monday, March 24th, 2014 and is filed under Uncategorized
The topic of due diligence on alternative investments seems to be popping up everywhere lately. Now the SEC is adding its analysis to the slough of regulatory documents on the subject. A recent risk alert issued by the SEC’s Office of Compliance Inspections and Examinations (OCIE) discusses the due diligence processes advisors and RIAs use when recommending alternative investments.
Despite the climate of regulatory scrutiny, money continues to flow into alternative investments such as structured products, non-traded REITs, and BDCs. Several FINRA notices, as well as the recent Rule 2111, focus on suitability and due diligence requirements surrounding these investments. However, the SEC risk alert approaches the issue from a slightly different angle. Where the SEC is concerned, the fiduciary responsibility of private fund advisors and RIAs necessitates expanding due diligence procedures when recommending alternative investment programs.
The SEC’s objective with this risk alert is to raise awareness of compliance and legal requirements so that fiduciaries make investment recommendations that are consistent with client investment objectives as well as ensure that the program’s operation is consistent with its objectives. The risk alert is a findings report of OCIE’s observation of industry trends in due diligence. It comes as no surprise that the staff finds that due diligence on alternative investment products is more challenging, both because of the complex nature of the investment itself and because investment managers can be reluctant to provide the level of transparency that advisors are seeking.
One solution that OCIE finds advisors turning to more often than in the past is third party due diligence. Third party firms, such as FactRight, validate or supplement information provided by program sponsors or managers. Now more than ever, advisors are realizing the benefits of having third party verification of an investment sponsor’s relationships and program assets and liabilities.
The OCIE alert also notes that more advisors are including quantitative analysis of sponsor and program financial statements as part of their due diligence process. It is apparent that rooting out errors, misrepresentations, or aberrations in financial statements is becoming a part of acting in the best interest of the client. This is another area in which third party firms can lend their expertise.
Clearly, regulators show no sign of relaxing the intense focus they apply to alternative investments and those who recommend them. In order to stay compliant, fund advisors and RIAs face ever-increasing demands on their time and resources. FactRight is poised to assist advisors in meeting the compliance challenges surrounding alternative investments with comprehensive yet scalable third party due diligence services.
Monday, March 17th, 2014 and is filed under Uncategorized
In its annual letter outlining examination priorities, FINRA makes it clear that firms that deal in complex products should be prepared for even more scrutiny in 2014. FINRA’s release of regulatory and examination priorities for 2014 not only confirms its continued focus on complex products but also expands target issues surrounding these products to include more emphasis on suitability and “interest rate sensitive securities,” such as non-traded REITs.
FINRA continues to place more emphasis on the need for advisors to conduct more in-depth analysis and documentation when it comes to suitability of complex products. Regulators are concerned that these products are particularly difficult for retail customers to understand, and they are pushing advisors to more thoughtfully consider the suitability of the investor from the point of initial recommendation. FINRA believes that both unbalanced disclosure practices, particularly when disclosures do not include examples of negative outcomes, and lack of broker training on specific products are further contributing to suitability issues.
Interest Rate Sensitivity
Firms need to be prepared to demonstrate awareness and disclosure of how interest rate changes may affect what FINRA has called “interest rate sensitive securities,” such as ETFs and non-traded REITs. FINRA sees a need to expand special investor protection practices related to these products. The letter states:
“FINRA remains concerned about the suitability of recommendations to retail investors for complex products whose risk-return profiles, including their sensitivity to interest rate changes, underlying product or index volatility, fee structures or complexity may be challenging for investors to understand.” (Emphasis added.)
The 2014 letter highlights the need for investor awareness that interest rate sensitive securities may lose substantial value due to rises in interest rates, and the loss in value may be disproportionate to the interest rate increase.
While broker dealers understand the need for investor protection surrounding complex products, it is undeniable that regulatory demands are making it more and more difficult for firms that legitimately use these products to conduct their business. Firms and advisors can protect themselves by renewing their commitment to compliance documentation procedures and by staying up-to-date on the changing landscape of complex product offerings.
Friday, February 28th, 2014 and is filed under Uncategorized
We’ve all heard about plenty of fraud cases in the investment world since Madoff was discovered. As recently as February 2014, the SEC accused a fund manager of defrauding fund investors to pay personal and corporate expenses that were not disclosed to the investors. Even when managers do not commit fraud, they can take action in their corporate affairs that adversely impact funds and investors.
More than ever, financial services firms need to intimately analyze a sponsor’s activities through deep and thorough due diligence. Of critical concern are the operational developments of a sponsor company and its overall financial health. Financial problems may affect the sponsor’s ability to effectively manage a program, and changes in leadership, or legal proceedings may also have an impact. Corporate functions do not operate in isolation of one another; changes to any one area could affect other areas. To help manage the myriad risks involved, financial services firms need an experienced due diligence provider that can uncover areas of concern and clearly communicate how they impact the company as a whole and the funds a sponsor manages and supports.
FactRight has a solution.
FactRight’s Sponsor Operational Due Diligence Reports offer both a comprehensive view of a program sponsor’s financial and operational health. Our operational due diligence approach is designed to highlight risks at multiple levels of an organization. Our diverse set of professionals is trained to help you understand them and take steps to minimize risks, where possible.
Not only are a sponsor’s operations and financials reviewed, our team of analysts go one-step further. We provide commentary on trends and significant events and how these and other developments may impact the sponsor and its programs.
Sponsor organizations often present significant complexity. FactRight helps break down this complexity using straightforward, easy to understand analysis. To learn more about FactRight’s Sponsor Operational Due Diligence Reporting, contact us today.
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Thursday, February 13th, 2014 and is filed under Uncategorized
Investor demand for public non-listed real estate investment trusts (REITs), non-listed business development companies (BDCs) and other direct participation programs in 2013 exceeded $24.5 billion, an all-time record, according to The Investment Program Association (IPA), a trade association for Direct Investment vehicles, and Robert A. Stanger & Company, an independent investment banking firm that specializes in direct investment securities. Data developed by Stanger show equity capital flows to Direct Investments in 2013 were up $11.2 billion from the 2012 total of $13.4 billion – an 84% year-over-year increase.
Approximately 80% of total capital raised by Direct Investments in 2013 was committed to public non-listed REITs. Prior to 2013, the highest annual total for non-listed REIT investing was $11.5 billion in 2007. Cumulatively, since the year 2000, over $105 billion of equity capital has been invested in non-listed REITs.
BDCs, which were introduced into the independent broker dealer channel as recently as 2009, have grown to become the second largest sector of the public Direct Investment marketplace. These investments provide financing for growth to businesses in a wide variety of industries, which are otherwise capital constrained. “BDCs have become a staple of the direct investment market,” said Hogan. Investment in BDCs set a record in 2013 of $4.8 billion, up from $2.8 billion in 2012.
Click to read the full press release.