Transcript 0900-1-Campbell-Overview-of-NASAA-Guidelines2011

Overview of NASAA
Guidelines
Direct Participation Programs
Real Estate Investment Trusts SOP
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Definitions
 Affiliate
 Independent Trustee(s)
►Associated if Trustee for more than 3 REITs organized by
the Sponsor or advised by the Advisor
►Associated if Trustee owns an interest in the Sponsor,
Advisor, or any of the Affiliates
Real Estate Investment Trusts SOP
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Capital Requirements
 Unconditional contribution of Sponsor/Affiliate to
REIT
 The lesser of 10% of total net assets upon
completion of the offering or $200,000
Real Estate Investment Trusts SOP
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Election of Trustees
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Vacancies
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Minimum of 3, elected annually
Majority Independent from Advisor & Sponsor
Independent Trustees must nominate replacements for
Independent Trustee vacancies
Committees
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Made up of a majority of Independent Trustees
Real Estate Investment Trusts SOP
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Majority Independent Trustee Approval
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Minimum capital
The advisory contract with the Sponsor
Liability & indemnification provisions
All fee, compensation & expense items
Affiliated transactions
Investment policies
Excess leverage
Investments in mortgage loans
Notice of annual & special meetings
Real Estate Investment Trusts SOP
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Trustee Duties
 Review & ratify Declaration of Trust
 Establish written investment & borrowing policies
 Monitor administrative procedures, investment operations &
performance of the REIT & Advisor
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Trustee Experience
 Non-Independent Trustees: 3 yrs. relevant experience
 1 Independent Trustee: 3 yrs. relevant R.E. experience
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Fiduciary Duties
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Catch-all provision
Real Estate Investment Trusts SOP
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Advisory Agreement
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1 year contract
Terminable by majority of Independent Trustees or Advisor
upon 60 day written notice w/o cause or penalty
Advisor Compensation
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Mandatory review by Independent Trustees as they must
supervise the performance of the Advisor
Real Estate Investment Trusts SOP
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Indemnification
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REIT shall not provide for indemnification of Trustees,
Advisors & Affiliates nor hold harmless unless certain
elements are met
Investor Suitability
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70/70/250 test
Some states have adopted enhanced suitability standards
Real Estate Investment Trusts SOP
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Subscription Agreement
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No required SH representations that are subjective,
unreasonable & might cause SH to believe he/she
surrendered rights entitled to under state/federal law
No required SH representations that have effect of shifting
duties regarding suitability from B-D to SH
Completion of Sale
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5 business days after SH received final Prospectus
Real Estate Investment Trusts SOP
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Fee Structure
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Organizational & Offering Expenses
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Annual determination by Independent Trustees that fees &
expenses are reasonable
Reasonable and may not exceed 15% of offering proceeds
Acquisition Fees & Expenses
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Reasonable and may not exceed 6% of contract price of RE
or mortgage loan acquired
Real Estate Investment Trusts SOP
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Operating Expenses
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Excessive if exceed greater of 2% of Average Invested
Assets or 25% of Net Income in any fiscal year
Real Estate Commission
 Paid if provide substantial amount of services to sell property
 Up to ½ of the brokerage commission paid, but not to exceed
3% of sales price
 When added to sums paid to unaffiliated parties, shall not
exceed the lesser of the Competitive Real Estate Commission
or 6% of sales price
Real Estate Investment Trusts SOP
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Incentive Fees
 Interest in gain from the sale of assets of the REIT
 Reasonable if does not exceed 15% of the balance of net
proceeds after distribution to Shareholders
Real Estate Investment Trusts SOP
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Leverage
 Maximum in relation to Net Assets not to exceed 300%
 Approval from a majority of the Independent Trustees
required to exceed the 300% threshold
Real Estate Investment Trusts SOP
► Conflict of Interest
 Some prohibitions unless
►Approved by a majority of Trustees (including a majority of
Independent Trustees) not otherwise interested
►Fair, reasonable & on conditions not less favorable to REIT
as those available from 3rd parties
Real Estate Investment Trusts SOP
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Statement of Objectives
 In prospectus
 Reviewed by Independent Trustees
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Multiple Programs
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Roll-up transaction
 Appraisal of REIT assets by independent expert
Real Estate Investment Trusts SOP
►Other Limitations of REIT
 Unimproved real property: 10%
 Mortgage loans, construction loans, on any 1
property: 85% of appraised value
 Issuance of redeemable equity securities
 Options/warrants to the Advisor, Trustees,
Sponsors, or Affiliates
►only on same terms as public
►not exceed 10% of outstanding shares
Real Estate Investment Trusts SOP
► Voting Rights of Shareholder
►Offering other than voting shares looked upon with
disfavor
►Changes to investment or financing policies requires a
majority vote of the Shareholders
►Sale of all or subst. all of REIT’s assets requires a majority
vote of the Shareholders
►Merger, Reorganization, Liquidation, etc.
Real Estate Investment Trusts SOP
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Other Items
Escrow provisions
► Risk Factor re: Economic Downturn
► Distributions
► Commissions/Fees re: reinvestment plans
► Reports
► Access to records
► Distribution Reinvestment Plans generally
► Items to be contained in Declaration of Trust
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Registration of
Equipment Programs
Registration of Equipment Programs
 Current programs may have asset backed
characteristics
►Acquire leases rather than equipment
 Waiver language
►Similar to REIT and Commodity Pool SOPs
Registration of Equipment Programs
► Sponsor Requirements
 Experience
►Like other DPP = minimum of 3 yrs. relevant experience
 Net Worth
►Sponsor’s NW
 Greater of $50,000 or 5% of contributions in all existing
programs in which Sponsor has potential liability plus 5% of
the Program Interests being offered
Registration of Equipment Programs
► Compensation
& Expenses
 O & O E = Reasonable w/ deferral to state
statutes
 Investment in Equipment = Greater of:
►75%
Capital Contributions or
►80% Capital Contributions reduced .0625%/1%
indebtedness
Registration of Equipment Programs
► Compensation
& Expenses Cont.
 Investment in Equipment Example
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50% leverage
 => 80% - .0625(50) =
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76.875% investment in equipment
Registration of Equipment Programs
► Compensation
& Expenses Cont.
 Carried Interest for excess commitment
►Each
1% excess = Promotional interest of 1%
distributions after 100% return of capital; or
►1%
interest for first 2.5% excess commitment, 1%
for next 2%, and 1% for each 1% thereafter
►The
only Carried Interest Allowed
Registration of Equipment Programs
► Compensation
& Expenses Cont.
 Example
50% leverage = 76.875%
Commits 82% = 5.125% excess
 A. 5.125% interest in distribution after return of capital; or
 B. 1% for 2.5%
1% for 2.0%
1% for 1.0%
2.5
4.5
5.125
1%
1%
(5.125-4.5) = .625%
Total Carried Interest of 2.625%
Registration of Equipment Programs
► Compensation
►Promotional
& Expenses Cont.
Interest
 5% Cash Available for Distribution and 1% Net Disposition
Proceeds until 100% plus 8% per annum return. Thereafter
= 15%; or
 20% Cash Available for Distribution & Net Distribution
Proceeds after return of capital plus 8% per annum
Registration of Equipment Programs
► Compensation
& Expenses Cont.
 Additional Fees
 Must be competitive
 Usually verbatim from the Guidelines
 Expense Reimbursement
►Lower
of cost or independent 3rd party
►No duplicate fees
Registration of Equipment Programs
► Conflicts
of Interest
 Mandatory Disclosure
 Sales/Leases to/from the Program
►Independent
3rd Party terms
►Program may lease to Sponsor under lease
agreement
►May only purchase from Sponsor if Specified
Program
Registration of Equipment Programs
► Conflicts
of Interest Cont.
 Multiple Programs
►Unlike
REITs
►Prohibited unless different investment objective or
Specified Program
 Minimum Capitalization
►$1,000,000
Registration of
Commodity Pools
Registration of Commodity Pools
►Net Worth/Investment
 Sponsor’s net worth must = 5% of Capital Contributions
in all existing programs in which Sponsor has potential
liability + 5% of the Program Interests being offered
 In no case < $50,000 permitted
 In no case > $1,000,000 required
Registration of Commodity Pools
►Capital Contribution
 The Sponsor must make a permanent investment in the
Program equal to the greater of 1% of Capital Contributions
or $25,000
►Minimum Program Capital
 Any minimum less than $500,000 presumed inadequate to
spread the risk
 Provision must be made for escrow & return of 100% of paid
subscriptions if min. not met
Registration of Commodity Pools
►Tax Ruling/Opinion
 If Program organized as a LP, it must obtain a favorable tax
ruling from IRS or an opinion of qualified tax counsel
concerning tax status of a LP in an acceptable form
►Fees, Compensation & Expenses
 Generally, only those items of compensation set forth in
Guidelines are permissible, unless variance can be
adequately justified
 All Program expenses shall be billed directly to and paid by
the Program
Registration of Commodity Pools
►Organizational & Offering Expenses
 shall be reasonable and shall not exceed 15% of the Capital
Contributions of the offering, regardless of source of
payment and including redemption fees
►Net Asset Fee
 All fees are classified as Net Asset Fee, unless specifically
excluded (i.e. incentive fees & brokerage commissions)
 Shall not exceed ½ of 1% of net assets per month/6%
annually
 Neither the Sponsor nor Advisor may receive a management
or advisory fee if participates in brokerage commissions
Registration of Commodity Pools
►Incentive Fees
 Shall not exceed 15% of the new trading profits, calculated
not more often than quarterly
► Interplay b/t Net Asset Fee & Incentive Fee
 Sponsor or Advisor entitled to additional 2% Incentive Fee for
each 1% by which the Net Asset Fee is reduced below 6%
annually
Registration of Commodity Pools
►Multiple Advisor Programs
 Disclosure in summary & text of Prospectus that Incentive
Fee may be paid to Advisor(s) for a given period despite
aggregate Program losses
►Brokerage Commissions
 Disclosure of estimate of range of round turn commissions to
be paid-brokerage rate as a % of avg. Net Assets annually
 Presumptively reasonable if satisfies 1 of 2 tests
Registration of Commodity Pools
►Annual/Periodic Reporting
 Compliance with CFTC reporting regulations suffices
►Trading Advisor Contracts
 1 year contract & terminable w/o penalty upon 60 days
written notice by Program
Registration of Commodity Pools
►Conflicts of Interest
 Mandatory disclosure of Conflicts of Interest
 Mandatory disclosure of steps Program will take to alleviate
real/potential conflicts
 Presumptively unreasonable for Advisor to be affiliated w/
Program Broker & w/ Sponsor if Sponsor receives any portion
of the brokerage commission, directly or indirectly, including
trail commissions
Tips for New Examiners
How to: Get up to Speed in a Short Time
► Knowledge sharing
► Gaining access to/gathering sample comment letters
► Understanding
the deal generally
► Requesting copies of comment letters from other
departments
► Working through the SOP/Guidelines and
understanding the spirit behind such
► Researching the laws of incorporation
► Learning to spot issues that arise more frequently
Knowledge Gathering Tips
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Understand filing requirements (SEC and internal
department/agency requirements)
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Understand spirit behind the Guidelines, Statutes, Regulations,
Positions, Orders, etc. and not simply the letter of the law
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Ascertain what other regulatory bodies are reviewing the
offering documents and understand the roles of such
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Understand internal review process
Review Materials for Use by Examiners
► NASAA Statements of Policy/Guidelines
► State Statutes, Regulations, Positions,
► Analyst notes
► Outside media sources
Orders, etc.