WASHINGTON - Congressional inquiries into alleged overvaluation of pension fund real estate commingled funds have revived the issue of SEC authority over real estate managers.
The Securities and Exchange Commission was expected to reply Nov. 28 to a letter written earlier this month to Arthur Levitt, its chairman, by Reps. Edward Markey, D-Mass., and Jack Fields, R-Texas. They asked about the SEC's authority to monitor real estate money managers that sponsor commingled funds.
The congressmen left open the possibility that legislation could be proposed to regulate the actions of real estate managers.
"Several recent press reports allege overvaluations of real estate by investment advisers to pension plans," the congressmen wrote. "Some of these press reports detail the acknowledged overstatement of values by Prudential Insurance Company in two if its large, open-end commingled funds. According to these press reports, however, such overvaluations may not be limited to the PRISA funds, but instead may reflect a widespread practice in the industry."
(Indeed, the Idaho Public Employees Retirement System earlier this year hired an independent firm to value its commingled real estate investments and concluded its 11 funds were overvalued an average of 16%.)
The congressmen asked about the SEC's authority over the managers because they are registered with the commission under the Securities Act of 1940.
The congressmen noted that two years ago the SEC tried to cancel the registration of real estate advisers because they don't give advice about securities as stipulated in the act.
The SEC claimed real estate money managers registered with the commission solely to qualify as investment managers under the Employee Retirement Income Security Act.
Cancellation of the real estate adviser's registration would have made the pension fund trustees personally liable for the decisions of their advisers, thus curtailing the advisers' business.
"We have been informed that the commission has taken the issue under advisement and has not moved forward to de-register such advisers," the congressmen wrote.
Telephone calls to the SEC inquiring about the status of its investigation were not returned.
Representatives of real estate manager trade organizations were waiting for more information before responding to the congressmen's inquiry.
"What we need is more detail on what is being said," said Richard Gaskins, executive director of the National Council of Real Estate Investment Fiduciaries, Chicago.
Wylie Greig, president of NCREIF and director of research with The RREEF Funds, San Francisco, said the organization's research tracking appraisals and sales was available to any who inquired.
Fred Halperin, executive director of the National Association of Real Estate Investment Managers, Los Angeles, thought the SEC plan to de-register the real estate investment managers had been "put to bed" following discussions with advocates for the money managers.
In addition to questions about why real estate advisers are registered with the SEC, Reps. Markey and Fields also inquired about:
The statutory or regulatory provisions that apply to a registered investment adviser that directs external and/or internal appraisals of assets on which their compensation is based, and if the commission has investigated the appraised values or the appraisal process.
If SEC regulations are violated when a valuation does not result in a current or marked-to-market value.
The regulations governing the investment activities of advisers who conduct the transfers of interests in commingled real estate funds among new or existing institutional customers.
Whether insurance companies, which do not have to register with the SEC, should be required to do so if they act as a broker/dealer in the transfer of commingled fund units.
The review the commission conducts of real estate investment managers; how many times during the past five years the firms have been reviewed; and if the real estate advisers have been reluctant to provide the commission with information.