Good Risk Governance Pays - Investment Best Practices | Risk Management | Valuation

Published on April 29, 2013 by the Investment Program Association ("IPA") Board of Directors, "Valuations of Publicly Registered Non-Listed REITs" seeks to promote transparency, uniformity and independence for investors in commercial real estate. According to the IPA website, these guidelines follow a 24-month period of discussion about how best to value non-listed Real Estate Investment Trusts ("REITs") and supercede the 1989 valuation standards for Direct Participation Programs ("DPPs") and 1993 and 1994 modifications.

One advantage cited by the authors of these guidelines is that a third party assessment may be superior to variable methods currently being used by broker-dealers who must report the value on investor statements. The Financial Industry Regulatory Authority ("FINRA") describes REITs that are not listed on a national securities exchange as "Non-Traded" with a "[v]ery limited secondary market." They urge investors to acknowledge "valuation complexities" and to query financial advisors about illiquidity risk. For more information, see "Public Non-Traded REITs - Perform a Careful Review Before Investing." A few days ago, FINRA released Regulatory Notice 13-18 entitled "Communications With the Public" about unlisted REITs and unlisted DPPs. They urge broker-dealers to provide information in a way that is "fair, balanced and not misleading" with respect to the following items:

• Distribution Rates;
• Volatility;
• Redemption Features and Liquidity Events;
• Historical Information That is Consistent and Not Selective;
• Selecton of Appropriate Benchmark; 
• Capitalization Rates; and
• Photos of Underlying Property With Clarification About the Ownership Structure.

In its investor assistance memorandum about REITs, the U.S. Securities and Exchange Commission ("SEC") lists lack of liquidity, difficulty in assessing value, conflicts of interest, large up-front fees and the source of distributions as caveats for non-listed REITs. See "Investor Bulletin: Real Estate Investment Trusts (REITs)", published by the Office of Investor Education and Advocacy, U.S. Securities and Exchange Commission.

Interested readers can click to access "The Investor's Guide to REITs," published by the National Association of Real Estate Investment Trusts in January 2013. See page 6 for a discussion of benefits of investing indirectly in real estate via REITs. These include diversification and an "attractive risk/reward balance."

The U.S. Department of Labor estimates that there are roughly 4,400 financial organizations relying upon the DOL’s Qualified Professional Asset Manager (“QPAM”) class exemption when managing the assets of their own employee benefit plans. Maintaining QPAM status is important for these asset managers as this class exemption facilitates their ability to make investment decisions with respect to their plans without the need to monitor compliance with the prohibited transaction rules of Section 406(a) of ERISA.  Following an amendment to the QPAM class exemption by the DOL that went into effect in 2012, to secure their QPAM status when they manage the assets of plans they sponsor, financial firms must satisfy an additional hurdle to be able to meet the QPAM exemption requirements - an annual compliance audit conducted by an independent party.

With an impending June 30, 2013 deadline to complete their QPAM audits, financial firms managing assets of their sponsored ERISA plans are confronting the intricacies of this audit process. The goal of this informative and timely webinar is to help asset managers understand what is required to maintain QPAM status with respect to transactions they direct for their own plans.  Join an inter-disciplinary panel of legal, auditing and economic experts to learn about these QPAM audit requirements and how to conduct a QPAM audit.  Topics that will be covered include:

• The QPAM exemption, why and when an audit is required;
• QPAM audit requirements;
• How trading activity is tested;
• What policies and procedures must be reviewed;
• Logistics of data gathering and examination of this data;
• Type of report that an organization is likely to receive; and
• Correcting any deficiencies uncovered by the audit team.

On May 1, 2013, Dr. Susan Mangiero co-presented as part of a webinar entitled "QPAM Compliance Audits: How Asset Managers Can Minimize Regulatory Risks and the Cost of Breach." Sponsored by Seyfarth Shaw, LLP, the program described the consequences of non-compliance as well as the governance and risk management benefits associated with a QPAM audit.

Click to download the QPAM webinar slides from May 1, 2013.

As an ardent free marketeer, I always welcome an opportunity for a healthy debate with anyone who wants to talk about where we are now, where we could be and what went wrong in the last several decades. Most people however don't typically want to talk about the philosophy of freedom that goes hand in hand with the construct of laissez faire. I understand this reality and am resigned to an occasional discussion about pragmatic economic policies instead of the kind of honest exchange about ideas that are rarely accepted in polite company. (I have lost a few party invitations as the result of diving deep into the political philosophy pool.) That is why I was surprised to read that more professors are starting to focus on the who, why, when, what and where of Milton Friedman and other like-minded advocates of an anti-Marx, anti-socialist perspective. As a former academic, I vividly recall that a mention of capitalism was often an invitation to shrieks and moans from liberal arts colleagues. My, how things have changed...or have they really?

According to "In History Departments, It's Up With Capitalism," New York Times reporter Jennifer Schuessler (April 6, 2013) writes that entire courses about the evolution of free markets are popping up everywhere. Insurance, banking and brokers are the subjects of widely read doctoral dissertations. Pundits are writing about the moguls who run the economy and professors are quick to explain that market savvy is not their strong point. School is still out as to whether students will get a fair and balanced look at the entrepreneurs who create unprecedented wealth for their investors, new jobs and innovative improvements that add to the quality of life.

There has been a lot of tumult in the last five or six years. Bad players continue to be unmasked. This is a good thing. I vote to shed even more light on what works and to embrace the honest lions (men and women) of business who decipher what consumers want and deliver cost-effective solutions accordingly (often by using their own money and toiling excruciatingly long hours).

As for a candid give and take, those who disdain the free market approach are encouraged to explain why governments are in a better position than the invisible hand to enhance commercial development. This is not to eschew the vital role of the law in enforcing property rights. To  the contrary, intellectual property protection is the cornerstone of economic risk-taking and the associated benefits of successful entrepreneurialism.

As famed champion of economic freedom, Friedrich August von Hayek, once complained, "I have arrived at the conviction that the neglect by economists to discuss seriously what is really the crucial problem of our time is due to a certain timidity about soiling their hands by going from purely scientific questions into value questions." On this day that former UK prime minister Margaret Thatcher passed away, remember her admonition that "The trouble with socialists is that they always run out of other people's money."

Hurry up the chatter. A serious discussion about the merits of capitalism, post market meltdown, is long overdue.

I am delighted to have been invited to join the faculty of the Master’s Track at the annual fi360 investment fiduciary conference, held this year in Scottsdale, Arizona. Speakers include: (1) ERISA attorney Charles Humphrey (2) Edward Lynch, AIFA, RF, GFS with Fiduciary Plan Governance, LLC (3) Dr. Susan Mangiero, AIFA, CFA, FRM with Fiduciary Leadership, LLC and (4) pension auditor Michelle Sullivan, CPA with Freed Maxick CPAs

The fi360 Master’s Track offerings are created especially for those with a knowledge of fiduciary standards and how that standard applies to the topics being presented.

Our session is entitled "Due Diligence for Alternative Investments." Our panel will focus both on the legal issues and the internal control compliance issues that cannot be ignored by anyone with a fiduciary responsibility to prudently select and monitor. This session will describe the impact of Dodd-Frank on investing in alternatives, various court cases and regulatory enforcement actions as well as the DOL/IRS regulatory guidance on alternative investment allocations. Click to read more about this session and the other sessions to be presented at this conference of investment fiduciary professionals from April 17 to April 19.

In a recent excursion to my local Starbuck's, I surprisingly discovered that a major drugstore chain had moved in over the weekend, installing its equipment at the former location of a privately-owned pharmacy. Those in the know say that the 80-year old "mom and pop" business was urged to sell or see its national competitor move in across the street. The message was pretty clear. Sell or lose revenue to a well-capitalized opponent.

Competition is nothing new. Some experts consider healthy competition to be the lifeblood of a capitalist system. Consumers almost always benefit from lower costs, expanded inventory and/or better service. Yes, some rue the day when large chain stores muscle out local vendors. Remember the Shop Around the Corner children's bookstore that was pushed into oblivion by Fox Books as portrayed in You've Got Mail? Protests to preserve the charm of Meg Ryan's operation gave way to the appeal of being able to choose from a large selection of books while sipping a cappuccino from the cafe of Tom Hank's mega-store.

However, what is good for some may not be so for others. Shareholders of a company that faces more competition may see the value of its interests decline, depending on the ability (and associated costs) of a firm to respond. If the company operates as part of a mature industry, maintaining (or improving) profit margin and market share has its challenges.

As a trained appraiser and someone who serves as a financial expert on matters that involve questions about valuation, investment performance, risk-taking and suitability, I am surprised whenever I discover that the issue of competitors has not been duly vetted. Investors need to carefully monitor the competitive landscape on an ongoing basis, whether to partake in an Initial Public Offering, approve an exit via acquisition or merger or rebalance their holdings.

The folly of ignoring the threat of competition (or at least giving it short shrift) is the topic of a March 21 article about Lululemon. According to Business Insider's Ashley Lutz in "The Walls Are Closing In On Lululemon," intense competition is giving this retailer a headache and arguably worsening the economic impact of a recall of 17 percent of its black luon yoga pants for being too sheer. Nike, Under Armour and the Gap are some of the firms that offer "very similar products in response to Lululemon's popularity." In another Business Insider piece, Athleta, Calvin Klein, Old Navy, Gaiam, Victoria's Secret and Nordstrom are other cited firms that want to monetize the buying habits of the downward dog crowd. See "15 Hot Brands Vying To Be The Next Lululemon." This increase in competitive pressure comes as no surprise to me. As a devotee of yoga, I can understand why someone would go elsewhere to buy pants at $30 a pop versus $100, especially if you are likely to frequently replace workout clothes because of wear and tear. That said, Lululemon (ticker symbol is LULU) has enough high ticket buyers to have grown from its 1998 start in Vancouver as a health-focused "community hub" to nearly 200 stores worldwide with a market capitalization of over $9.33 billion (according to Yahoo! Finance).

Whether Lululemon can bounce back quickly is a hot discussion item this week. According to "Lululemon Expects More Write-Offs on Pants" by Wall Street Journal reporter Andrew Dowell (March 21, 2013), the true costs of the recall remains to be seen. One reader offers that the increased publicity could work in the company's favor to generate more visibility and therefore more sales. During a March 21 earnings call, Lululemon's CEO Christine Day described strong fundamentals, excellent results in 2012 and a commitment to "earn the loyalty of our customers and shareholders every day going forward." She comments that 2013 results will likely reflect "lost revenue in the range of $57 million to $67 million" plus additional costs related to the write-down of the yoga pants in question. See "lululemon athletica inc. announces fourth quarter and full year fiscal 2012 results."

According to the NASDAQ website, 337 institutional holders own 96.34 percent of Lululemon shares. These include Capital World Investors, Lone Pine Capital, Fidelity, JP Morgan, Ameriprise, UBS and Vanguard.