DST Investments: Navigating SEC and FINRA Regulations

Delaware Statutory Trusts (DST) may offer tax deferral and passive income, but they must also adhere to certain rules to ensure investor protection and eligibility for specific benefits. Aside from the IRS, there are two more governing bodies that, in some ways, regulate DSTs — the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA).

Investors don’t play a direct role in ensuring DST regulatory compliance, but knowing the requirements and frameworks can be helpful when choosing your next investment. Below, Realized 1031 shares what you need to know.

DST SEC Compliance

DSTs are structured so investors own beneficial interests, and any entity with interests is subject to regulation by the SEC. This authority is the primary federal agency that governs securities, and DST interests fall under this category. Keep in mind, though, that DSTs are private investments. This means that DSTs are not required to register securities with the SEC under Regulation D. The commission regulates DSTs in other ways, such as the following.

• Disclosure Requirements: DSTs must provide a private placement memorandum (PPM) to each investor outlining key details of the DST.

• Accredited Investor: The SEC primarily allows accredited investors to participate in DSTs. Non-accredited investors must be “sophisticated” to enter DSTs, and a maximum of 35 non-accredited investors are permitted.

• Fiduciary Responsibility: Sponsors are expected to act in the best interest of investors by presenting accurate and transparent information.

• Anti-fraud Provisions: While registration is not needed, DSTs are still subject to anti-fraud laws, specifically Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. These rules mean DSTs must submit annual reports and disclose certain important events that may affect the DST’s performance.

DST FINRA Compliance

Delaware Statutory Trust FINRA compliance focuses more on the broker-dealers who are selling or marketing DST securities to investors. FINRA’s regulations ensure the following.

• Suitability Standards Are Met: FINRA compels broker-dealers to assess whether a DST is suitable for an investor. This regulation ensures that broker-dealers sell investments that align with your financial profile.

• Advertising and Communication Standards: The authority also ensures that broker-dealers use marketing materials that are balanced and not misleading.

• Fair Dealing and Professional Conduct: Broker-dealers are expected to recommend DSTs responsibly and avoid conflicts of interest. FINRA wants these professionals to put your interests first before the commission they might receive.

Do Investors Play a Role in Delaware Statutory Trust SEC and FINRA Compliance?

Thankfully, investors are not expected to navigate SEC and FINRA compliance. The sponsor, given their role in the DST formation and management, handles these requirements. As an investor, your primary role is to evaluate the offers presented to you, perform due diligence, and ensure that you’re working with licensed broker-dealers who are already operating within the regulatory framework.

Aside from the broker-dealer, investors must check the DST itself to determine if it’s following SEC regulations. Evaluate the PPM, the sponsor’s track record, and third-party reports to get the full picture and avoid headaches in the future.

Wrapping Up: SEC and FINRA Compliance in DSTs

DSTs are heavily regulated in various aspects, not just their structure but also the way they market their offerings or disclose the investments. Understanding the rules set by FINRA and the SEC helps you become a more discerning investor who knows what to look for. You can commit to a DST with complete confidence and peace of mind.

Sources:

https://assurancedimensions.com/the-basics-of-finra-compliance-for-broker-dealers/

https://www.law.cornell.edu/wex/securities_exchange_act_of_1934

https://www.investopedia.com/terms/r/regulationd.asp