LEGAL02/35866818v8

September 24, 2015

Submitted Electronically – e-ORI@dol.gov and e-OED@dol.gov

Office of Regulations and Interpretations

Office of Exemption Determinations

Employee Benefits Security Administration

U.S. Department of Labor

200 Constitution Ave., NW

Washington, DC 20210

Re: Definition of the Term “Fiduciary” (RIN 1210-AB32);

Best Interest Contract Exemption (ZRIN 1210-ZA25)

Ladies and Gentlemen:

NorthStar Asset Management Group Inc. (“NSAM”) submits the following additional 

comments regarding the rule proposed by the U.S. Department of Labor (the “Department”),

which would redefine who is a “fiduciary” by reason of providing investment advice for a fee or 

other compensation (the “Proposed Rule”) and the related proposed Best Interest Contract 

Exemption (the “BIC Exemption”).1 

As NSAM noted in its letter to the Department dated July 21, 2015, NSAM is a member 

of the Investment Program Association (“IPA”) and concurred with the IPA’s initial comment 

letter. NSAM provides asset management and other services to a variety of traded and nontraded public companies, including entities defined as Public Products in the IPA comment letter, 

such as publicly registered, non-exchange listed real estate investment trusts (“Non-Listed 

REITs”) and publicly registered, non-exchange listed Business Development Companies (“NonListed BDCs”). 

As an initial matter, NSAM strongly believes that the Department should take into 

account all of the comments received and testimony provided in connection with the Proposed 

Rule and the BIC Exemption and prepare and publish a re-proposed rule for public comment. 

Based on the large number of comments received and requests to testify before the Department, 

it is clear that the potential negative impacts of the Proposed Rule greatly exceed the 

Department’s understanding and expectations. As set forth in the comment letter submitted by 

 

1

See Proposed Conflict of Interest Rule, 80 Fed. Reg. 21960 (proposed Apr. 20, 2015 (to 

be codified at 29 C.F.R. pt. 2550); and Proposed Best Interest Contract Exemption, 80 Fed. Reg. 

21960 (proposed Apr. 20, 2015 (to be codified at 29 C.F.R. pt. 2550). 
2

LEGAL02/35866818v8

the U.S. Chamber of Commerce on July 17, 2015, the Proposed Rule will have broad and far 

reaching consequences. Such dramatic changes merit careful consideration, with the ultimate 

goal being to adopt a rule that is effective and beneficial to investors, even if additional time is 

required to achieve that goal. 

If the Department proceeds with the Proposed Rule and BIC Exemption without further 

public comment, NSAM respectfully asks that the Department: (1) reject the concept of a “legal 

list” in its entirety or (2) include Non-Listed REITs and Non-Listed BDCs in the definition of 

“Assets” eligible for the application of the BIC Exemption. 

It is our understanding that the Department’s two primary concerns with including NonListed REITs and Non-Listed BDCs on the list of eligible Assets are transparency and liquidity. 

With the implementation of amended FINRA Rule 2340, FINRA’s customer account statement 

rule, effective April 11, 2016, we believe that the valuation of Non-Listed REITs and Non-Listed 

BDCs will sufficiently address the Department’s concerns about valuation transparency. With 

respect to liquidity, while we believe there are many benefits to non-listed products, including 

avoiding the volatility in the market unrelated to the actual performance of a company’s assets, 

NSAM is willing to consider enhanced liquidity features if permitted to do so by the regulations 

adopted by the Securities and Exchange Commission (“SEC”). 

As discussed below, the Department’s concerns about Non-Listed REITs and Non-Listed 

BDCs can be adequately addressed through existing regulations alone, or in combination with 

the protections provided by the BIC Exemption. If Non-Listed REITs and Non-Listed BDCs are 

not eligible for the BIC Exemption, and there is no other applicable exemption, the impact would 

be to significantly restrict the range of investment options available to participants in most 

retirement plans and accounts. 

I. The Department Should Reject the Concept of a Legal List.

As numerous commenters have observed, it would cause harm to retirement plan 

investors to attempt to define in advance a list of investment products eligible for prohibited 

transaction exemptions. Attempts to require trustees to select investments from a statutory list of

approved investments (“legal lists”) have not been successful. As a result, the drafters of 

Restatement (Third) of Trusts concluded that “[k]nowledge, practices, and experience in the 

modern investment world have demonstrated that arbitrary restrictions on trust investments are 

unwarranted and often counterproductive.”2 

Indeed, the Department itself has previously recognized that it is not appropriate “to 

include in the [fiduciary] regulation any list of investments, classes of investment, or investment 

techniques that might be permissive under the ‘prudence’ rule. No such list could be complete; 

moreover, the Department does not intend to create or suggest a ‘legal list’ of investments for 

plan fiduciaries.”3 Similarly, in the preamble to the proposed BIC Exemption, the Department 

 

2 Restatement (Third) of Trusts, Ch. 17, Investment of Trust Funds (Introductory Note, Edward C. Halbach, Jr., 

Reporter); See, also, Jeffrey N. Gordon, The Puzzling Persistence of the Constrained Prudent Man Rule, 62 N.Y.U.L. REV. 52 

(1987).

3 44 Fed.Reg. 31639 (June 1, 1976). 
3

LEGAL02/35866818v8

emphasized that it intended to adopt a “principles-based” or “standards-based” approach that 

“would flexibly accommodate a wide range of current business practices” while minimizing 

conflicts of interest.4 

While we believe the existing regulatory framework adequately protects retirement plan 

investors, if the BIC Exemption is adopted, its ample disclosure requirements and enhanced 

investor protections should be sufficient to allow retirement plan investors to invest in any 

product that their financial advisors deem to be in their best interests. For example, the BIC 

Exemption explicitly requires disclosure of information relating to fees, compensation and 

material conflicts of interest. The BIC Exemption also requires a contractual agreement to 

adhere to impartial conduct standards, and the adoption of policies and procedures designed to 

mitigate material conflicts of interest. Further, BIC contracts would be subject to judicial 

enforcement. 

There is no reason to preclude certain investment products from investors when they 

would be subject to such additional robust investor protections and disclosure requirements. 

Maintaining a “legal list” will restrict investor access to current and future products that have 

been, or may become, beneficial for ERISA accountholders. Dispensing with the concept of a 

legal list would provide retirement plan investors with more choice and opportunities for 

diversification while requiring the additional safeguards provided by the BIC Exemption. 

II. New and Existing Regulations Provide Robust Transparency Requirements 

for Non-Listed REITs and Non-Listed BDCs, and the Additional 

Requirements Proposed by the IPA Should Satisfy the Department’s 

Concerns.

New FINRA Regulation

Recent changes to NASD Rule 2340 will sufficiently address the Department’s goal of 

greater transparency by imposing requirements for Non-Listed REITs and Non-Listed BDCs 

relating to the reporting of their share values on customer account statements and by requiring 

the material involvement and confirmation of such reported values by third-party valuation 

experts.5 As described in FINRA Regulatory Notice 15-02, amended Rule 2340 (i) requires 

general securities members to provide estimated per share values on customer account statements

based on either a net investment or appraised value methodology, (ii) shortens the time period 

before a valuation based on an appraisal is required to be disclosed and (iii) provides important 

additional disclosures to investors, including information about return of capital distributions, the 

non-listed status of the security, lack of liquidity and the potential that the investment may be 

sold for less than its estimated value.

NSAM believes that, in addition to providing enhanced disclosure regarding the value of 

a Non-Listed REIT and Non-Listed BDCs and providing such disclosure earlier, the amended 

 

4 Proposed BIC Exemption, at 21961.

5

See FINRA Regulatory Notice 15-02 (discussing how amended NASD Rule 2340 will provide two different options for 

calculating estimated per share values of products, such as Non-Listed REITs and Non-Listed BDCs, on customer account 

statements). Available at: http://www.finra.org/sites/default/files/notice_doc_file_ref/Notice_Regulatory_15-02.pdf.
4

LEGAL02/35866818v8

Rule 2340 will result in Non-Listed REITs and Non-Listed BDCs adopting additional 

compensation structures that can meet the needs of a wide variety of investors.

Existing SEC, FINRA and State Regulation

As discussed in our prior comment letter, Non-Listed REITs and Non-Listed BDCs are

registered with the SEC and are subject to the SEC’s extensive and ongoing disclosure 

requirements during the course of their public offerings to investors and after such offerings have 

been completed. These disclosures include regular prospectus supplements and post-effective 

amendments to the registration statements for ongoing offerings, as well as annual and quarterly 

reports and current reports regarding material developments. Non-Listed REITs and Non-Listed 

BDCs are also subject to extensive regulation by state securities regulators, including a “merit 

review” of their offerings in most states. 

In addition, broker-dealers offering investments in Non-Listed REITs or Non-Listed 

BDCs are also subject to additional product-specific disclosure requirements pursuant to FINRA 

Rule 2310. Prior to investing, Section (b)(3) of the Rule requires “that all material facts are 

adequately and accurately disclosed [to offerees] and provide a basis for evaluating the 

program.”6 In determining the adequacy of disclosure, FINRA sets minimum guidelines for 

broker-dealers, such as: “(i) items of compensation; (ii) physical properties; (iii) tax aspects; 

(iv) financial stability and experience of the sponsor; (v) the program’s conflicts and risk factors; 

and (vi) appraisals and other pertinent reports.”

7

 In addition, FINRA Rule 2310 requires that a 

broker-dealer disclose to all offerees “all pertinent facts relating to the liquidity and marketability 

of the program or REIT”.8 This requirement results in Non-Listed REITs and Non-Listed BDCs 

including in their registration statements disclosure regarding the status of liquidity events for all 

prior public programs sponsored by the same sponsor. Moreover, FINRA Rule 2310 stipulates 

that a broker-dealer may not sell a publicly registered Non-Listed REIT or Non-Listed BDC 

security unless the issuer agrees to provide a valuation in its annual report (or other public 

filing). 

III. Requiring Non-Listed REITs and Non-Listed BDCs to Provide Investors 

with Enhanced Liquidity Would Alleviate the Department’s Concerns 

regarding Adding Non-Listed REITs and Non-Listed BDCs to the “Legal 

List” of Assets.

As discussed in NSAM’s July 21st letter, there are benefits associated with the lack of 

correlation to capital markets associated with Non-Listed REITs and Non-Listed BDCs, and 

retirement investors with a long-term investment strategy may rationally prefer REIT and BDC 

exposure not subject to daily market volatility. Moreover, Non-Listed REITs and Non-Listed 

BDCs typically have provisions that permit redemptions subject to certain limitations prior to the 

 

6 See, e.g., Disclosures for Direct Participation Programs, which includes REITs discussed herein, Section (b)(3)(A) of 

FINRA Rule 2310, available at: http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=8469.

7 See, e.g., Disclosures, Section (b)(3)(B)(i)-(vi) of FINRA Rule 2310.

8 Section (b)(3)(D of FINRA Rule 2310.
5

LEGAL02/35866818v8

date the Non-Listed REIT or Non-Listed BDC provides full liquidity to investors upon the 

consummation of a liquidity event (such as a stock exchange listing, sale or merger with an 

exchange-listed company or liquidation of assets). In fact, none of the NSAM-sponsored NonListed REITs has ever declined an investor’s request for redemption. NSAM believes that these 

liquidity provisions are adequate for retirement plan investors. 

Potential Additional Liquidity

To the extent the Department determines that existing liquidity provisions are inadequate, 

there are options available other than requiring Non-Listed REITs and Non-Listed BDCs to be 

listed, and subject to daily market fluctuation, or not offered to retirement plan investors at all. 

For example, additional provisions to mandate liquidity opportunities upon the occurrence of 

specific exigent circumstances may be workable. 

Another possible approach would be to offer liquidity to investors with respect to a 

certain percentage of their overall investment on an annual basis even absent exigent 

circumstances. For example, the ability to redeem up to 10% of an investment at net asset value 

on an annual basis or other more flexible liquidity features would provide adequate liquidity for 

long-term, retirement plan investors, and we believe would be feasible for Non-Listed REITs and 

Non-Listed BDCs. Such a provision would require SEC approval, but subject to such approval, 

offering additional liquidity in this way would both cure the Department’s concerns without 

restricting choice and diversification options for retirement plan investors. 

IV. Conclusion

NSAM wishes to thank the Department for its consideration and its attention to this issue, 

which will have far-reaching consequences for the sponsors of Non-Listed REITs and NonListed BDCs. Again, this is a very complex issue with vast implications, as evidenced by the 

large number of issues and concerns raised by over 2,500 separate comments and two days of 

testimony. Such important and sophisticated issues should be resolved only after thorough 

evaluation and review. If the Department has any additional question, please do not hesitate to 

contact me directly. 
6

LEGAL02/35866818v8

Sincerely,

Daniel R. Gilbert 

Chief Investment and Operating Officer,

NorthStar Asset Management Group

Chief Executive Officer and President,

NorthStar Real Estate Income Trust, Inc.

NorthStar Real Estate Income II, Inc.

NorthStar/RXR New York Metro Income, 

Inc.

Executive Chairman,

NorthStar Healthcare Income, Inc.