NAREIM Legal, Compliance & Risk meeting, key takeaways

November 8, 2024

The private fund marketing rule – and the need to disclose deal-level net returns – will continue to be a key focus for the SEC under a second Trump administration, despite the fact 100% of NAREIM members expect SEC activity to decrease in the future.

During NAREIM’s Legal, Compliance & Risk meeting this week, members repeatedly heard the SEC’s rule on net return disclosures under the Marketing Rule would likely remain in force thanks to the SEC’s significant enforcement and examination divisions and that the Marketing Rule passed under the previous Trump administration.

Real estate investment managers were therefore advised to continue their work on deal-level net returns and substantiation of marketing materials, as well as the impact of subscription lines, in the knowledge that key components of the Marketing Rule were “here to stay”.

Key highlights from the discussions included:

Subscription lines and the impact on returns

• The SEC is starting to increasingly “poke and prod” this issue, with the SEC starting to report deficiencies. It’s an area managers were advised to “nail down” quickly.

• A member poll revealed, half of managers (52%) are showing gross and net returns both with and without the impact of subs lines – while one in five (19%) show gross and net returns without the impact of subs line.

Deal-level net return calculations

• Half of managers (50%) are calculating gross to net discount factors on actual fund expenses compared to one quarter (27%) using a prior analogous fund and 15% using a hypothetical model portfolio.

• Challenges remain however over how to account for the J-curve – and when managers should pivot from using a hypothetical model to actual fund expenses, with some managers using a blended hypothetical model and target model to mitigate the impact of the J-curve.

• Experts noted all formulas were “imperfect”, with most vanilla vehicles using a gross to net discount factor based on spreads for the prior quarter. 

• The key takeaway for managers was to note that SEC actions focus on whether the net is presented and disclosed in materials. “We haven’t seen actions on how the spread is calculated.”

The key message from the Legal, Compliance & Risk meeting though was one of being "extremely clear and extremely consistent" - and to substantiate everything.

Substantiate everything

One NAREIM member shared they required all materials to be substantiated – to get teams into the habit of recording data points and references. It was then down to compliance to decide what was considered “marketing”.

Almost all members said compliance led verification efforts to ensure marketing materials and models were being substantiated properly. On substantiation, the meeting heard again, was an issue “here to stay” for the SEC.

• To learn more about NAREIM and it's peer-to-peer meetings, contact Zoe Hughes and IvyLee Rosario for more details. Contact details can be found here.