Are REITS Investment Advisers?

by Allen Matkins

A REIT is an acronym for Real Estate Investment Trust, although the term more properly refers to tax status than a specific entity type.  For a variety of reasons, a REIT may involve several different types of entities.  The raison d’être of REITS is to provide a tax-preferred mechanism for investment in a professionally managed portfolio of real estate assets.  In light of this purpose, one might expect that an internally managed REIT would not be subject to registration as an investment adviser.

Of course, the starting point for answering this question is the definition of “investment adviser”.  Corporations Code Section 25009 defines an “investment adviser” as any person who for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing or selling securities, or who, for compensation and as a part of a regular business, publishes analyses or reports concerning securities.  This is essentially the same definition as that found in Section 202(a)(11) of the federal Investment Advisers Act of 1940.  Thus, if the same question should arise under federal law.  However, I suspect that until Congress repealed the fewer-than-fifteen client exception as part of the Dodd-Frank Act, many REITS took the position that even if they met the definition they could rely on the exception in former Section 203(b)(3) of the Advisers Act.  In fact, some urged the Securities and Exchange Commission to clarify the status of REITS as part of its rulemaking to implement the new venture capital, private fund and foreign private advisers.  For an excellent analysis of this problem, see Gilbert Menna’s comment letter.

Returning to California, the Department of Corporations actually has a rule exempting any person who does not hold itself out generally to the public as an investment adviser, and who advises only banks, trust companies, savings and loan associations, real estate investment trusts as defined in Section 23000 and 23002 of the Code, or other organizations specified in Section 25203 of the Code.  10 CCR § 260.204.2.  This sounds promising for REITS but the definition of “real estate investment trust” in Section 23000 is limited to unincorporated associations and trusts and is so out of date that it refers to the Internal Revenue Code of 1954.  Section 23002 doesn’t even define “real estate investment trust”.  (It may be that a prior version of that statute included a definition. 

A quotidien source of annoyance is the inconsistent spelling of the term for those who provide investment advice.  Technically, the word is an agent-noun.  That is the term used to describe a person who is performing some action.  For example, a person who teaches is denominated a teacher.  Agent-nouns are often formed by adding the agent-noun endings -er or -or.  But is one who provides investment advice an adviser or an advisor?  

Both the Investment Advisers Act and the Corporate Securities Law use the -er agent-noun ending.  In most cases, the -er ending is used with English words (e.g., do and doer) and the -or ending is used with the supine stem of Latin words (e.g., act (from the Latin actum) and actor).  However, this is far from a universal practice.  Perhaps because the law uses many Latinate words, lawyers (note the -er stem) seem to prefer to use the -or ending – for example, payor rather than payer.  I’m at a loss to explain why statutes use the -er stem for the noun but the -or stem for the adjective (as in investment advisory services or contracts).  See, e.g., Cal. Corp. Code § 25230 or Section 205 of the Investment Advisers Act.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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