AI Quarterly Winter 2016

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WINTER 2016 VOLUME 10 ISSUE 1

Points of View on the

DOL Fiduciary Rule Access to alternative investment options would be prohibitively expensive for many investors.

I DOL’s Fiduciary Rule and Ensuing Chaos

I Game Over for the Independent Broker-Dealer

and Alternative Asset Manager Community I Aquisition Focused Energy Product Structures I ADISA News

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ALTERNATIVE INVESTMENTS QUARTERLY

1 A Commissionable Offense?

4 ADISA’s Point of View on the DOL Fiduciary Rule

ADISA EDITORIAL BOARD Chair I Brandon Raatikka I FactRight, LLC Brandon Balkman I Orchard Securities Linda Dewlaney I Preferred Partnership Services

8 Department of Labor’s Point of View on Proposed Fiduciary Rule

Eric Perkins I Perkins Law PLLC

10 CONTACT INFORMATION ADISA I 10401 N Meridian St., Suite 202 I Indianapolis, IN 46290 Direct: 317.663.4180 I Toll Free: 866.353.8422 Fax: 317.815.0871 I E-mail: adisa@adisa.org John Harrison I Executive Director I 317.663.4172 Adam Abubakr I Director of Accounting & Data Systems I 317.663.4177

Descent Into Madness: The Department of Labor’s Fiduciary Rule and Ensuing Chaos

14 Game Change for the Independent Broker-Dealer and Alternative Asset Manager Community

Tanisha Bibbs I Director of Event Planning I 317.663.4174 Jennifer Fitzgerald I Director of Marketing I 317.663.4175 Tony Grego I Director of Business Development I 317.663.4173 Erin Balcerzak I Administrative Assistant I 317.663.4183 Design I DesignMark I Susie Cooper

adisa.org Copyright © 2016

By ADISA (Alternative & Direct Investment Securities Association), formerly REISA, formerly the Tenant-In-Common Association.

All rights reserved. Readers may copy sections of this publication for personal use. However, it is a violation of U.S. copyright laws to copy substantial portions of the publication for any reason without permission. The Copyright Act of 1976 provides for damages for illegal copying. If you wish to copy and distribute sections of this publication, contact Jennifer Fitzgerald at jfitzgerald@adisa.org.

20 Trends in Non-Traded Energy Products: Acquisition-Focused Energy Programs

26 ADISA News & Events

Executive Director’s Letter

A Commissionable Offense?

DOL

By John Harrison, Executive Director, ADISA

Editor’s Note: This letter was written to the Wall Street Journal regarding the proposed Fiduciary Rule, December 2014

There’s an issue upcoming that not only raises concerns across the aisle in Congress but also alarms those of varying socioeconomic groups. It is the possibility of a Department of Labor broadening of the fiduciary standard as it applies to retirement plan advice—potentially expanding fiduciaries to include 401(k) and IRA providers such as independent broker-dealers and independent financial advisors. A proposed expansion of the fiduciary definition is a distinct possibility before the new Congress settles in, and it would have serious unintended consequences: those providing investment advice for plans could be regarded as fiduciaries and as such could not be compensated by commissions. ➤

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Theoretically, the DOL’s proposal is an effort to ensure that IRA investors and ERISA (Covered Plan) participants receive investment advice without any commissions in the process. It is not known what business model may substitute or how the cost of sales administration will be paid for, but presumably the investor will pay more directly. The DOL first proposed broadening the fiduciary definition in 2010; there was an uproar from a variety of sectors and from Congress. To date 183 Members of Congress from both houses wrote letters raising concern—ranging from Barney Frank (D-Mass.) to John Kline (R-Minn.). The DOL withheld redefining the term until a later time. The later time is reportedly now upon us.

This is no small matter in that millions of Americans of varying income brackets hold retirement plans and IRAs (totaling over $7 trillion), and they depend on commission-funded investment advice to manage these plans and their portfolios. Imagine the conversation with the retirement plan representative in middle America with a recently retired widow of middle class means: “Mrs. Wimble, because of a new rule from the Department of Labor, we can’t handle your retirement money anymore since we receive a commission from the funds. You’ll have to pay someone directly to watch over your IRA investments,” says the broker-dealer.

“But I already know you get commissions—somebody’s got to pay for the process. Don’t you disclose all that to me as it is? After all, aren’t you already overseen by government agencies?” asks Mrs. Wimble.

“Yes, we are transparent about the commissions we receive. And, true, we’re overseen by the Securities Exchange Commission, by the Financial Industry Regulatory Authority, and by our state regulators. And there are a vast array of choices out there, so we can get the right investment product for your needs,” says the representative. “But we don’t charge you directly, and the government doesn’t seem to like that.”

“Well, is my insurance agent going to have to charge me now? He’s independent and gets commissions too, right?” asks Mrs. Wimble.

“I don’t believe he has to charge you. You’re probably alright there,” says the broker-dealer.

“How about that retirement townhome I want to buy to be nearer my son, so I can help with the grandchildren? Is the real estate agent going to charge me a fee instead of the seller paying a commission?”

“No, Mrs. Wimble, you’re still OK on that count too, I hope,” answered the broker-dealer.

The unintended consequences of expanding who’s a fiduciary for qualified retirement money could be devastating to millions of average income Americans who are trying their best to save wisely for retirement (there are some 19 million IRA account holders and participants in more than 600,000 Covered Plans). Some wealthy can afford to pay an adviser by fee to manage their funds, the middle class not so much.

Since so many from so many walks have raised alarms, the DOL is certain to proceed with caution on any redefinition it now re-proposes. This time, we hope, the unintended consequences have been recognized. Ironically, our whole current system of tax-deferred savings replacing defined benefit plans came about as an unintended consequence of the 401(k) law in 1978. It turned out to be a good and totally unpredicted consequence for an increasingly mobile and job-changing population. After some thinking on the obscure 1978 law, a small firm in Pennsylvania began the nation’s first 401(k) plan. They worked for commissions, by the way, and it has been to all our benefit.

However, if the DOL expands the fiduciary definition too broadly, it will surely not be so. ▲

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ALL SAVERS ALL SAVERS AREN’T THE SAME ALLTHE SAVERS AREN’T SAME AREN’T THE SAME

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ADISA’s Point of View on the DOL Fiduciary Rule

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As an organization, ADISA stands concerned about the Department of Labor’s (DOL) fast-tracked proposed fiduciary rule on retirement accounts.

The restrictions in the proposed rule will limit the ability of many to choose a financial professional who can fit within a given budget, and this will no doubt limit the type of investment products available to them.

Giving retirement savers the ability to access expert financial advice is important, not only for the knowledge involved, but also because many alternative products—long available only to the portfolios of the wealthy—are accessible to many investors of all levels through an advisor. If the DOL’s long list of complex restrictions is put into effect, advisors will have to accept access to fewer options.

Most financial advisors currently are able to offer alternative investment options (including REITs, BDCs, energy products, and the like) to their clients. Access to these would be prohibitively expensive for many investors if advisors must convert to a fee-only basis, a likely consequent of the DOL’s rule.

Saving for retirement for most people is difficult enough as it is. The DOL’s proposed rule places additional burdensome regulations on retirement savings, the effect of which would be to limit investor choices. Having access to a diversified mix

Having access to a diversified mix of investment products is essential for an advisor to tailor retirement planning to the investor’s desires and needs.

of investment products is essential for an advisor to tailor retirement planning to the investor’s desires and needs.

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What ADISA Has Done So Far

ADISA believes that the proposal suffers from several fundamental flaws, and as such should be withdrawn by the DOL.

Submitted comment letter to the DOL regarding the proposed rule July 21, 2015 Summary of comments of the letter: ADISA believes that the proposal suffers from several fundamental flaws, and as such should be withdrawn by the DOL. These flaws fall into three categories: A. The proposal unfairly and improperly targets financial advisors who receive variable compensation, and would eliminate the ability of financial advisors and their clients to choose the service model most appropriate to their needs, especially the needs of younger and/or lower net worth individuals.

B. The proposal represents a piece-meal approach to regulating financial advisors, which will only create confusion and differential treatment of retirement savers and investors generally.

C. The best interest contract exemption (BICE) would limit the types of products and programs available to retirement accounts and their owners, and potentially negatively impact their ability to meet their savings and retirement goals.

Testified before the DOL regarding the proposed rule August 13, 2015 John Grady, ADISA’s Vice President and Legislative & Regulatory committee chair, testified on ADISA’s behalf regarding the proposed rule before the DOL. He commented: “The DOL’s proposed rulemaking was the subject of nearly four full days of hearings during August. ADISA appeared during those hearings, as did many other individuals, companies and associations, and summarized its views on the proposed rule changes and so-called ‘best interest contract exemption.’ Under required administrative action protocols, the DOL has to consider the comments received and determine whether to make any changes to its April 2015 proposal. In the meantime, various members of Congress are, with prompting from ADISA and other organizations, seeking to convince or direct the DOL to either suspend its rule making efforts or substantially revamp its proposal.”

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Submitted additional comments on the DOL Fiduciary Rule hearings September 23, 2015 Summary of comments: ADISA’s new letter provided follow up on questions asked during hearings, specifically those posed by DOL staffer Judy Mares. Ms. Mares asked to be “walked through a typical non-traded REIT…,” and focused her questions in part on non-listed REIT disclosure documents and minimum requirements for purchasers. Panel responses honed in mostly on the regulatory aspects of non-listed REITs, including minimum net worth and income requirements imposed by the various states. While ADISA provided a broad perspective on non-listed REITs and BDCs in the course of the hearings, the discussion around these products and other direct participation programs did not address a host of issues that ADISA’s board believes are integral to understanding the role that these products play in retirement savers’ portfolios, both large and small.

“We didn’t want the DOL to come away with the view that non-traded alternatives are available to or purchased by only well-to-do retirement savers,” said Grady. The major points of the follow up comments included the following: • Descriptions of non-listed REITs, BDCs, and other direct participation programs • Characteristics of the above with special attention to their channels of access • Importance of non-listed alternatives for all investors • Potential harm if personal financial advice is discouraged

Partnered in a SIFMA-led advertising campaign Earlier this fall, ADISA partnered with other financial organizations to launch an advertising campaign that encourages public and financial professionals to take action to protect retirement choices by contacting members of Congress. The ad campaign, which launched in early August and ran through mid-November, includes both digital and print components, and links to the microsite www.KeepRetirementOpen.com, which urges constituents to contact members of Congress with concerns. ADISA’s board of directors chose to take part in this initiative at the invitation of the Securities Industry and Financial

Editor’s Note:

Markets Association (SIFMA), which spearheaded the campaign. The other organizations

See page 3 for a sample of a printed ad.

involved are the Financial Services Institute (FSI), Financial Services Roundtable (FSR), Investment Company Institute (ICI), and Insured Retirement Institute (IRI).

Created website for ADISA members to contact Members of Congress regarding proposed rule ADISA also created a convenient website through which you can contact your member of Congress regarding the DOL’s proposed fiduciary rule. ADISA’s contact Congress sample text is from the alternative investment point of view.

Visit www.adisa.org/Legislative/DOL to voice your opinion. ▲

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Department of Labor’s Point of View on Proposed Fiduciary Rule

U.S. Labor Department seeks public comment on proposal to protect consumers from conflicts of interest in retirement advice WASHINGTON—The U.S. Department of Labor has released a proposed rule that will protect 401(k) and IRA investors by mitigating the effect of conflicts of interest in the retirement investment marketplace. A White House Council of Economic Advisers analysis found that these conflicts of interest result in annual losses of about 1 percentage point for affected investors—or about $17 billion per year in total.

Under the proposals, retirement advisers will be required to put their clients’ best interests before their own profits. Those who wish to receive payments from companies selling products they recommend and forms of compensation that create conflicts of interest will need to rely on one of several proposed prohibited transaction exemptions.

“This boils down to a very simple concept: if someone is paid to give you retirement investment advice, that person should be working in your best interest,” said Secretary of Labor Thomas E. Perez. “As commonsense as this may be, laws to protect consumers and ensure that financial advisers are giving the best advice in a complex market have not kept pace. Our proposed rule would change that. Under the proposed rule, retirement advisers can be paid in various ways, as long as they are willing to put their customers’ best interest first.”

Today’s announcement includes a proposed rule that would update and close loopholes in a nearly 40-year-old regulation. The proposal would expand the number of persons who are subject to fiduciary best interest standards when they provide retirement investment advice. It also

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Editor’s Note: The U.S. Department of Labor did not respond to AI Quarterly’s request to provide their point of view on the proposed fiduciary rule. Below is the press release seeking public comment on the new proposal, found on its website (www.dol.gov) and dated April 14, 2015.

includes a package of proposed exemptions allowing advisers to continue to receive payments that could create conflicts of interest if the conditions of the exemption are met. In addition, the announcement includes a comprehensive economic analysis of the proposals’ expected gains to investors and costs.

The proposed “best interest contract exemption” represents a new approach to exemptions that is broad, flexible, principles-based and can adapt to evolving business practices. It would be available to advisers who make investment recommendations to individual plan participants, IRA investors and small plans. It would require retirement investment advisers and their firms to formally acknowledge fiduciary status and enter into a contract with their customers in which they commit to fundamental standards of impartial conduct. These include giving advice that is in the customer’s best interest and making truthful statements about investments and their compensation.

If fiduciary advisers and their firms enter into and comply with such a contract, clearly explain investment fees and costs, have appropriate policies and procedures to mitigate the harmful effects of conflicts of interest, and retain certain data on their performance, they can receive common types of fees that fiduciary advisers could otherwise not receive under the law. These include commissions, revenue sharing, and 12b-1 fees. If they do not, they generally must refrain from recommending investments for which they receive conflicted compensation, unless the payments fall under the scope of another exemption.

In addition to the new best interest contract exemption, the proposal also includes other new exemptions and updates some exemptions previously available for investment advice to plan sponsors and participants. For example, the proposal includes a new exemption for principal transactions. In addition, the proposal asks for comment on a new “low-fee exemption” that would allow firms to accept conflicted payments when recommending the lowest-fee products in a given product class, with even fewer requirements than the best interest contract exemption.

Finally, the proposal carves out general investment education from fiduciary status.

Sales pitches to large plan fiduciaries who are financial experts, and appraisals or valuations of the stock held by employee-stock ownership plans, are also carved out.

Links to the proposed fiduciary rule, prohibited transaction exemptions, economic impact analysis and other materials are available at www.dol.gov/ProtectYourSavings/, and will be published for public comment in an upcoming edition of the Federal Register. ▲

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Descent Into Madness: The Department of Labor’s Fiduciary Rule and Ensuing Chaos

By Deborah Schwager Froling, Arent Fox LLP Immediate Past Chair, ADISA Legislative & Regulatory Committee

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The Department of Labor (the “DOL”) has proposed a rule defining who is a “fiduciary” for purposes of providing financing advice to employee benefit plans and individual retirement accounts (“IRAs”) (the “Fiduciary Rule”). Those found to be fiduciaries to employee benefit plans and IRAs would be prohibited from receiving compensation from third parties in connection with transactions involving employee benefit plans and IRAs. There were exceptions, however, for brokerdealers to receive compensation depending on the types of investment product involved and meeting the other onerous requirements of the exemption (the “Best Interest Contract Exemption” or “BICE”).

The DOL has couched its proposal as requiring “retirement advisers to abide by a ‘fiduciary standard’—putting their clients’ best interest before their own profits.” If that were the case, most people would agree that clients’ best interests should be paramount. However, as we all know, the devil is in the details and in this case, the devil really is in the details.

The term “financial advisor” is used in public parlance to include both investment adviser representatives (“IARs”), who are licensed with investment advisers, as well as registered representatives (“RRs”), who are licensed with broker dealers. IARs already have a fiduciary duty to their clients to act in their best interests and they do not get paid on a transaction by transaction basis—they are paid based on assets under management (or AUM). RRs have a duty to provide recommendations to their clients that the investment is suitable for them. RRs generally have their clients’ best interests in mind when they recommend an investment, but the self-regulatory body that oversees RRs is the Financial Industry Regulatory Authority, Inc. (“FINRA”) and only requires a suitability analysis 1.

While the marketed concept of the proposed rule (i.e., investment advice should be in the best interests of the client) has wide public support, and is promoted by the White House,

While the marketed concept of the proposed rule (i.e., investment advice should be in the best interests of the client) has wide public support, and is promoted by the White House, it seems that the unintended consequences far outweigh the limited utility of the rule.

it seems that the unintended consequences far outweigh the limited utility of the rule. For the alternative investment industry, the rule could prove disastrous. Imagine the following: an investor hires a financial advisor to give investment advice and the investment funds are coming from a retirement account (as many people’s investments do). Now, what happens?

If that financial advisor is an RR, he or she will now be unable to recommend alternative investments, such as REITs, BDCs and/or private placements, because those investments pay selling commissions to the financial advisor, rather than charge a fee based on the amount of money the investor has determined to place with his or her financial advisor (i.e., assets under management or AUM).

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The DOL has couched its proposal as requiring “retirement advisers to abide by a ‘fiduciary standard’—putting their clients’ best interest before their own profits.” If that were the case, most people would agree that clients’ best interests should be paramount. However, as we all know, the devil is in the details and, in this case, the devil really is in the details.

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Does the average investor understand whether or not his or her financial advisor is an IAR or an RR? Do investors believe their investment options should be limited solely based upon the type of investment funds that are being used?

How many financial advisors are licensed as both RRs and IARs? To add to the confusion, Securities and Exchange Commission (SEC) Chair Mary Jo White continues to state that the SEC is working on its own fiduciary rule to harmonize the standards between RRs and IARs, as required under the Dodd-Frank Act. The SEC’s rule is expected to be more broad than the DOL’s rule, given that the DOL’s rule only applies to investments made within retirement accounts, whereas the SEC’s rule will apply to all products and investments sold by RRs. However, the SEC has not given a timetable for its release of such a proposed rule. Given those differences, it seems likely that a conflict will arise between the SEC’s regulatory scheme and the DOL’s. While the DOL has remained committed to moving forward with its rulemaking, it seems as though a pause and coordination should rule the day, rather than putting into place disparate rules that will cause even further confusion amongst the investing community and the financial advisors who serve it.

ADISA continues to believe that alternative investments, such as non-traded REITs, BDCs and other direct participation investments, including private placements, have a role to play in an investor’s investment portfolio, regardless of the types of funds used to make those investments. By eliminating the ability to use retirement accounts to make these long-term, non-correlative investments, it is doing further harm to investors’ overall portfolio diversification tools and their ability to make these types of investments with the very funds that have the best ability to take advantage of the long-term, non-correlative attributes of such investments.

While ADISA strongly believes that the DOL should work with the SEC to provide comprehensive regulation and oversight to protect investors in a way that will not create confusion on the part of investors trying to build value for their future, ADISA recognizes that perhaps the Fiduciary Rule has gained too much traction to be completely eliminated. In that event, the alternatives available to ADISA are to (1) nibble around the edges of the BICE and/ or (2) prepare ADISA members to work within the new regulatory scheme.

ADISA intends to continue to work hard on behalf of its members to do what it can in conjunction with other organizations like Financial Services Institute (FSI) and Securities Industry and Financial Markets Association (SIFMA) to modify the Fiduciary Rule, adjust the

1—FINRA Rule 2310(b)(2)(B)(i) —“(a) the participant is or will be in a financial position appropriate to enable him to realize to a significant extent the benefits described in the prospectus, including the tax benefits where they are a significant aspect of the program; (b) the participant has a fair market net worth sufficient to sustain the risks inherent in the program, including loss of investment and lack of liquidity; and (c) the program is otherwise suitable for the participant.”

BICE and/or educate its members to life in a brand new world. ▲

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Game Change for the Independent Broker-Dealer and Alternative Asset Manager Community

By John Grady, ADISA Vice President and Legislative & Regulatory Committee Chair

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It is an issue that is becoming harder and harder to ignore—the U.S. Department of Labor (the DOL) is on a path to radically change the way in which broker-dealers serve their retirement saver clients, particularly IRAs. In short, the DOL is proposing to make most persons who provide advice to retirement savers into “fiduciaries” under the Employee Retirement Income Security Act (ERISA), and force them to work under a complex, expensive and possibly unworkable “exemption” whenever they want to work with a retirement saver on a commission basis. This proposal, which is obviously a potential game changer for broker-dealers, is based upon the DOL’s claim that so-called “conflicted advice” is costing retirement savers billions of dollars every year.

In addition to understanding the basics of the DOL’s proposed rulemaking, it is critical for the broker-dealer community to understand how quickly this initiative is moving and what, if anything, it can do to be in the discussion. At this point, unfortunately, the DOL is well down the tracks with its initiative. There is a high likelihood that it will adopt a final version of its proposal in the very near future, perhaps as early as the first quarter of 2016.

If that were to occur, the revised definition of “fiduciary” as well as an accompanying “best interests contract exemption” (“BICE”) would likely become effective in late 2016, while the current administration is still in the White House.

What are the consequences of the proposal going through and onto the books as proposed? To put it mildly, the results would be at least game changing, and perhaps dire, for the broker-dealer community. The regulation tilts the playing field squarely in favor of

What are the consequences of the proposal going through and onto the books as proposed?

To put it mildly, the results would be at least game changing, and perhaps dire, for the broker-dealer community.

the fee-based advisory model, and would make broker-dealers wishing to continue their commission business for retirement clients to utilize the proposed BICE. The BICE is, in brief, both unworkable and uneconomic, and very few broker-dealers and their advisors will be able (much less willing) to comply with it. As a consequence, at least as it relates to retirement savers, the current commission-based approach to providing advice will disappear from the map.

Finally, what if anything can or should the broker dealer community do? No question about it, the DOL staff is intent upon pushing the proposal through, and the DOL has plenty of support from the White House and various consumer groups to do so. It appears that the only remaining option is for the industry’s rank and file to alert their elected representatives to their concerns. Congress might be persuaded to pressure the DOL into slowing down its initiative or revising its approach to make it less onerous for financial advisors who wish to serve their retirement saver clients using commission-based products. However, even that strategy, which worked the last time the DOL took steps in this direction, may not be enough to keep this initiative from going live in the next 12 months.

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The Proposal

advisor in relation to the value of the services provided to that

This is the Department of Labor’s second recent attempt to widen

which is “reasonable,” and contain disclosures regarding conflicts

the scope of its fiduciary regulations. In 2010, it proposed a rule

of interest, including explicit mention of all types of compensation

that would have re-defined the term “fiduciary” to reach nearly all

that the advisor may receive, whether or not the advisor offers

persons who provide investment advice to retirement savers and

proprietary products, and whether or not the advisor receives

retirement accounts for compensation. At the time, industry and

payments from third parties (revenue-sharing, etc.). In addition,

political opposition to the DOL’s agenda resulted in the proposed

the agreement may not include any provision limiting the right of

rule being withdrawn. Now, a proposed fiduciary rule is back.

the client to participate in class action litigation.

And it is bigger and more threatening to the independent brokerdealer community than ever.

The DOL’s focus is the set of regulations adopted under ERISA that define and regulate the conduct of “fiduciaries.” Under current law, fiduciary status for financial advisors is determined by reference to a five-part test. If the advisor providing advice to a plan or participant does not meet all five elements of the test, he or she is not considered to be a fiduciary and thus not prohibited from receiving most types of compensation. The rule proposed by DOL would eliminate the five-part test, and essentially provide that anyone who gives advice to a plan or plan participant with respect to the investment of assets in a covered plan (including IRAs) would be considered a fiduciary.

Substantially all of the interactions between financial advisors and qualified plans or plan participants would cause the advisor to be deemed a fiduciary under the new rules.

The Best Interest Contract Exemption As noted above, in order for financial advisors to receive compensation other than asset-based investment advisory fees in connection with provision of financial advice to qualified plans, they would need to qualify for an exemption. As part of its fiduciary proposal, the DOL proposed a class exemption called the “best interest

• Disclosures. The advisor must deliver a point-of-sale disclosure document to the client prior to any investment transaction. The disclosure must include estimates of the “all-in” cost of each individual investment for 1, 5, and 10 year periods. The cost of the investment must take into account several enumerated factors.

In addition, the firm must provide each client a written summary at the end of each calendar year setting forth information about every transaction executed in the account during the prior year.

The statement must include information about all compensation received by the firm in connection with each transaction, including information about payments from third parties. Finally, the firm must maintain a website containing information about compensation that it receives in connection with any product that has been purchased by a qualified plan or participant over the prior year.

• Limits on Investment Options. If the firm limits the menu of products that an investor may purchase in qualified plan accounts, the firm must make a specific written finding that these limitations do not prevent an advisor from providing advice that is in the best interest of the client. The scope of this is unclear, but if read literally, it could require the firm to either offer every available product in a given category (mutual funds, for example), or document why this would not cause harm to clients.

contract exemption” to allow advisors to receive compensation in

• Limitations on investments types. The BICE contains a list

connection with advice to covered plans and accounts.

of security types that a financial advisor may recommend to a

The proposed BICE imposes a large number of stringent

plan or plan participant. This list as published does not include

conditions, however, and if any of the conditions are not met,

most illiquid alternative investments, including non-traded REITs,

receipt of compensation by a financial advisor in connection

BDCs, and Reg D offerings such as hedge funds or private equity.

with provision of advice or services to a covered plan or

If this provision finds its way into the final rule, it would effectively

participant would be prohibited.

eliminate sales of most alternative investments to qualified plans

Exemption “Highlights”: • Written Contract between Clients and Advisors. All investors would be required to execute a written agreement with the financial advisor prior to any recommendation to purchase a security. The agreement must contain a number of provisions, including ones that cause the advisor to acknowledge that it is a fiduciary, require the advisor to adhere to certain “Impartial Conduct Standards,” limit the compensation received by the

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by any advisor who wishes to rely on the BICE.

The Consequences It would not be an exaggeration to say that the broker-dealer industry should see this initiative as a so-called “gamechanger.” Or, for some, such as those who use a commission model to serve retirement savers, or those who use non-listed or other “alternative” investments in serving such clients, it is likely the equivalent of “game over.”

It would not be an exaggeration to say that the broker-dealer industry should see this initiative as a so-called “game-changer.”

Or, for some, such as those who use a commission model to serve retirement savers, or those who use non-listed or other “alternative” investments in serving such clients, it is likely the equivalent of “game over.”

• Fee-Based Account Bias: Despite the DOL staff’s claims

cost increase. Therefore, it is highly likely that financial advisors

that the BICE is designed to ensure that the regulatory initiative

will stop serving such savers, leaving them without the kind of

is business model neutral, there is little doubt but that the

professional advice that they need and can currently access. This

regulation would tilt the outcome toward advisors who employ

is particularly likely to impact younger savers, who have not built

a fee-based approach to advising clients (i.e., one where a

up substantial retirement assets, as well as the large population of

client pays the firm a fee based on assets under management

older savers who have not amassed a significant portfolio.

or another metric), and away from advisors serving retirement

In response to this point, DOL staffers have suggested that

savers and who currently receive variable compensation based

retirement savers with smaller balances can access so called

on transactions. The BICE as proposed is literally unworkable

“robo” advisors,” which is a slang term for advisor firms that rely

for financial advisory firms, creating additional liability and

on computer driven, model advice programs to serve clients,

imposing an extraordinary level of compliance, operational

generally at low cost. While these advisors and their models may

and other costs on advisors and their firms. The proposed

ultimately play an important part in helping investors achieve their

BICE is so costly and cumbersome that is highly unlikely that

goals, their business models and investment acumen are far from

advisors will actually seek to comply with its terms. Thus, the

proven. Data shows that while “robo” advisors may offer lower

DOL proposal will likely lead to wholesale abandonment of the

costs, retirement savers may pay a high price when the element

variable compensation based model by financial advisors.

of human interaction is removed from the advice equation. To

While moving all financial professionals serving retirement

the extent that the DOL’s proposed approach gives preference

savers and accounts to a fee-based, fiduciary model may sound

to on-line, algorithm-based allocation and rebalancing tools,

positive, particularly as it would apply to higher net worth savers,

displacing personal, holistic investment advice delivered by a

there would be consequences for many retirement savers that the

professional, investors are denied a choice regarding how they

DOL does not acknowledge. There is a large part of the retirement

want to receive and pay for financial advice. Research shows

saver population that cannot be economically served under the

that investors who work with financial advisors save more and

fee-based model. Savers with lower balances, in particular, are

are better prepared for their retirements.

not well served by a fee-based model, and it is not economic

• Inequitable Portfolio Construction: The DOL’s approach,

for advisors to provide services to them under the fee-based approach. The increased costs to migrate clients to a fee-based model would be substantial. Furthermore, a large number of current IRAs come from smaller scale plans more susceptible to

which only captures advice given to retirement accounts, is likely to create differential portfolios for clients, depending on whether or not their assets are in a retirement saving account.

Financial advisors using a commission-based approach may

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be able only to serve a portion of the assets of their clients,

If the DOL goes forward with a defined list of assets eligible

depending on which business model they have chosen. Thus,

for use under the BICE, it is important that this list include all

the experience of a retirement saver and a non-retirement safer

manner of investment products and programs to ensure that

would be very different, notwithstanding the fact that the same

advisors employing the commission-based business model

advisory firm and financial advisor are serving them.

can build appropriate investment portfolios for retirement savers

The pricing for retirement accounts and savers also might be

and accounts. The DOL specifically asked whether additional

very different from pricing accorded other accounts managed by

investments should be included in the scope of the exemption.

the same firm. A firm that adopts a fiduciary model for its clients will

ADISA, among other groups, submitted letters stating that the

charge very different fees and expenses than one that is serving its

list of assets eligible for use under the BICE should include at a

non-retirement and retirement accounts using a transaction fee-

minimum (i) non-listed REITs, (ii) non-listed BDCs and (iii) non-

based business model. These differentials are unlikely to result in

traded oil & gas programs. As a general matter, these investment

clients paying fees that reflect the total value of the assets they

programs and products are compatible with the objectives of

hold with the firm. Most importantly, where a financial advisor

retirement investors in that they can provide income and inflation

must employ the fee-based model for clients that are retirement

protection, as well as capital growth, and provide retirement

savers or accounts, the DOL’s proposal would likely ensure that

investors with the opportunity to diversify and stabilize their

the same client will have different portfolios. While it is not unusual

portfolios of financial assets and thereby improve their risk/return

for an advisor to place different products or securities in different

profile in the same way as professionally managed institutional

accounts for tax, liquidity or other reasons, there is no reason why

pension and endowment plans. These assets have historically

that result should be dictated by a regulatory construct.

shown low correlations with financial markets, and therefore are

• Limited List of Approved Assets: Financial advisory firms

recognized as effective diversifiers.

serve many investors, including those saving for retirement, and

As this brief litany of potential consequences makes clear, the

use a variety of investment strategies, products and services to

DOL proposal is rife with change for the broker-dealer industry,

help clients reach their goals. Different products and services

much of it far reaching and potentially unfortunate. Whether the

offer different risk/return profiles, and can provide a wide variety

focus is the proposal’s bias toward the fee based model, or its

of benefits to investors, ranging from current income to capital

potential creation of unnecessarily disparate portfolios for similarly

appreciation. Under the DOL’s proposal, however, products

situated clients or the elimination of alternative investments for

would not be available to retirement savers where sold subject

retirement savers, the DOL’s approach is inherently problematic

to a commission or other variable compensation arrangement

for the broker-dealers who serve clients using the commission-

unless if sold in compliance with the BICE. As proposed, the

based approach. For that reason, the industry and its various

BICE employs a definitional concept that limits eligible products

associations and supporters have been involved in the DOL’s

and programs to those that meet the definition of “Assets.”1

initiative for more than a year. As discussed below, it is time for

Employing a static listing or category of variable compensation

the industry rank and file to become involved as well, as the time

investments that may be sold pursuant to the BICE is poor

to effect positive change in this initiative is running out and the

regulatory policy. Creating a universe of approved products

odds of successfully doing so are growing increasingly long.

means that the government—rather than the most creative and expert financial system in the world—is determining the scope

Status of the DOL’s Rulemaking Initiative

and content of investment options for retirement savers and

The DOL went down this very path in 2010, and withdrew its

accounts. Employing a list will no doubt exclude important and

rulemaking effort only when faced with significant opposition

useful new products from use by financial advisors, and will create

from Congress. The situation is very different this time. It is highly

an unnecessary and artificial distinction between retirement saver

likely that the proposed rule and associated exemption will be

portfolios and portfolios that are available to investors generally.

issued in final form in the very near future, perhaps as early

Moreover, a prescriptive asset list is also problematic because

as the first quarter of 2016. If that in fact occurs, the rule and

it selects which investments are appropriate based on current

accompanying exemption more than likely will have the force of

trends and beliefs, rendering it inflexible for future updates

law by the end of 2016, thus making it somewhat immune to the

in investment products and strategies. Such an approach is

normal embargo and review of all pending regulatory initiatives

problematic and may leave off potential future investments that

that accompanies a change of administration. In other words,

may be appropriate and valuable for retirement investors.

the time to push for change, or at least further review and study

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by the DOL pending a final rule, is now upon the entire industry.

The DOL issued its rule proposal and draft BICE in April 2015.

of the ability of a commission-based advisor to recommend to a retirement saver or retirement plan or account.

The DOL staff thereafter solicited comments on and held hearings

There are many types of letters that can be used. For one,

regarding the rule and the BICE this past summer. Senior DOL

ADISA has a letter than can be sent to various members of

staffers sat through 3 ½ days of testimony from industry groups

Congress asking for their help against the DOL initiative. (Go to

and others, some of whom opposed the initiative and others

http://www.adisa.org/Legislative/Call-to-Action-DOL-Fiduciary-

of whom supported it. They grilled industry leaders about their

Rule.) Whether your contact your representatives by letter or

opposition generally as well as to specific provisions, and sought

in person, by phone, text or email, it is important to explain

in their questions to elicit areas of purported agreement. To the

specifically why the initiative is not an appropriate exercise of

observer, the DOL was open minded and genuinely interested in

regulatory power and jurisdiction by the DOL. Remember in this

finding ways to achieve the desired policy goal—an end to advice

regard the core arguments advanced by ADISA (among others)

or advisory activities that do not advance the best interests of

in its comment letters on the proposal:

retirement savers—but generally unwilling to back away from its core belief that commission-based advice is inherently “conflicted” advice that costs clients billions of dollars a year.

After the August hearings were over, and final comments submitted, the process turned to potential revisions to the rule and BICE, as well as to the emerging political dynamic. On the former issue, it is important to keep in mind that while DOL staff sounded a conciliatory note in discussing its intended response to the comments it received, it is generally understood that

A. The DOL’s proposal unfairly and improperly targets financial advisors who receive variable compensation, and would eliminate the ability of financial advisors and their clients to choose the service model most appropriate to their needs, especially the needs of younger and/or lower net worth individuals.

B. The proposed initiative represents a piece-meal approach to regulating financial advisors, which will only create confusion and differential treatment of savers and investors generally.

the final rule and accompanying BICE will not be significantly

C. The BICE would limit the types of products and programs

different than what was proposed. Secretary Perez has made

available to retirement accounts and their owners, and

it clear that the DOL is fully engaged in getting a final rule out

potentially negatively impact their ability to meet their savings

as soon as practicable. It also appears that the DOL heard

and retirement goals.

nothing during the hearings or in meetings with industry groups to dissuade it from pursuing its primary objective.

On the political front, the industry has for some time been attempting to once again get Congress motivated to oppose the DOL and to cause the agency to retreat or delay its rulemaking.

Industry news sites contain a daily litany of initiatives and counterinitiatives intended to either block the DOL’s agenda or to reinforce it. The agency’s approach has powerful support from the Obama

D. An accurate assessment of the cost of complying with the requirements in the BICE is difficult, but it will be extremely high and very hard to pass along to clients or advisors.

E. The warranties in the client agreement specified by the BICE appear likely to create large new categories of legal claims for investors who are dissatisfied with the results of their investments. ▲

White House, as well as consumer groups and other important constituencies, and leading Congressional Democrats and presidential candidate Hillary Clinton, have called for an end to efforts in the House and Senate to limit or delay the DOL’s rulemaking.

At this point, it is not clear whether additional pressure can successfully be placed on the political system to stall or defeat

Thank you. Stay involved, stay active and stay alert. This is a critical time, and everyone’s help is needed. If you want help getting involved, please reach out to ADISA staff or a member of the ADISA board of directors.

the DOL’s proposal. Industry members should nonetheless get involved, if they have not already, in the issues and in the process itself. Whether through meetings, letter writing campaigns or other means, broker-dealers and their leaders should let their elected representatives know what they think about the DOL’s initiative and the effect(s) it is likely to have upon their business and their clients.

The same thing is true for sponsors of and advisors to alternatives

1—Eligible Assets under the BIC Exemption include only the following: “bank deposits, CDs, shares or interests in registered investment companies, bank collective funds, insurance company separate accounts, exchange-traded REITs, exchange-traded funds, corporate bonds offered pursuant to a registration statement under the Securities Act of 1933, agency debt securities as defined in FINRA Rule 6710(l) or its successor, U.S. Treasury securities as defined in FINRA Rule 6710(p) or its successor, insurance and annuity contracts (both securities and nonsecurities), guaranteed investment contracts, and equity securities within the meaning of 17 CFR 230.405 that are exchange traded securities within the meaning of 17 CFR 242.600.”

that, if BICE is adopted as proposed, would literally be outside

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Trends in Non-Traded Energy Products: Acquisition-Focused Energy Programs

By Bradford Updike, LLM, JD Mick Law P.C. LLO

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How far we have come in a year. WTI oil prices in July 2014 averaged $103 per barrel (“bbl”), with Brent oil pricing also pushing $110 per bbl.1 Through 2015, however, we have witnessed oil prices fluctuate from $40-$55 per barrel. On top of the challenges in the oil markets, natural gas operators and producers have not fared much better, with natural gas prices fluctuating levels of $2.00 to $2.50 per mcf through much of this year. 2 In spite of low oil and gas prices, a recent trend is developing within the non-traded retail-syndicated energy product space that is focused upon capturing some acquisition-driven upside that might not have existed at higher commodity prices. This article will explore these other opportunity-driven product structures.

Non-Traded MLP Designed Products MLPs are publicly traded companies that are structured as limited partnerships for federal income tax purposes that engage in up-stream, mid-stream or down-stream operations.3 There is also a non-traded MLP look-alike product (“MLP designed” products) that does not offer market liquidity but that has almost the same income tax consequences as MLPs and that are structured similar to.4 The MLP designed products are typically offered through private placements conducted under Rule 506 of Regulation D of the SEC Act of 1933 or by prospectus in an S-1 offering.

By analogy to the non-traded REITs in the investment market today, the MLP designed products aspire to become traded securities upon the development of their portfolio assets.

While the life cycle of MLP designed product is still in its infancy, the potential reach of the product may be very significant if one analogizes to the historic marketing success of nontraded real estate investment trusts, or “REITs” (i.e., $20 billion sales estimated annually).5 The fund sponsor with the most success to date in raising retail capital in a non-traded

In spite of low oil and gas prices, a recent trend is developing within the non-traded retail-syndicated energy product space that is focused upon capturing some acquisition-driven upside that might not have existed at higher commodity prices.

MLP designed platform is Atlas Growth Partners, which raised over $150 million from retail investors through May 2015.6 MLPs and their non-traded companions are set up to operate energy assets on a day- to- day basis. A majority of MLPs today are mid-stream and down-stream, but public MLP up-stream products that engage in drilling and lease development are growing in number.7 Investors who buy the public MLPs want regular income that comes to them on a tax preferred basis. Buyer motivations differ in the context of the non-traded MLP designed products. Distributions will be moderate due to the reinvestments of earnings used to develop the assets to position the

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MLPs and their non-traded companions are set up to operate energy assets on a day-to-day basis. A majority of MLPs today are mid-stream and down-stream, but public MLP up-stream products that engage in drilling and lease development are growing in number.

In terms of capitalization structure, MLPs and their non-traded companion products are both managed by a General Partner that receives a 2% interest in the equity of the fund, with investors as a group controlling the other 98% of the equity.

product for a future MLP listing event in 5-7 years.

In terms of capitalization structure, MLPs and their non-traded companion products are both managed by a General Partner that receives a 2% interest in the equity of the fund, with investors as a group controlling the other 98% of the equity. The General Partners also receive incentive distribution rights (“IDRs”). In the public arena, the IDRs incentivize the General Partner to distribute as much of the MLP’s cash flow to investors as possible. On the public side, the General Partner’s share of cash flow above a preferred investor distribution (e.g., 8% to 10%) varies depending upon the investor distribution. On the private side, the General Partner of the MLP designed product receives IDRs that entitle it to a share of the fund’s upside return if it is successful in listing its units at a certain valuation. On the private side, the distributions may be moderate (i.e., 6% annual target as opposed to an 8% to 10% target) due to the fact that the fund is reinvesting its free cash flow to develop assets and build value that can be potentially recognized at a listing event.

Both public MLPs and non-traded MLP designed products are pass-through entities whereby income and deductions are reported at the individual investor level. Ordinarily, a partnership whose units trade on a secondary market will be taxed as a corporation. However, special tax legislation adopted in 1987 carves out an exception for certain publicly traded partnerships engaged in natural resource development, production, and transportation (i.e., IRC §7704).

Public MLPs and their non-traded companions are both passive income generators due to the nature of the income (i.e., which is normally operations-driven income) and the nature of the interests being acquired by investors (i.e., which are limited partner interests). Note that passive deductions in a public MLP product only offset passive income of that product. So, if an MLP investor has excess passive deductions from the investment that exceed income, those deductions must be suspended and can be used to offset income from the underlying MLP for several years. The treatment of passive deductions for non-traded partnerships is different.

Those losses can offset passive income from other investments if needed.

Unrelated business taxable income (“UBTI”) is a special income tax incurred by qualified plan and IRA sourced investments in partnerships that engage in energy and real estate. UBTI will be incurred in both public and private products if that income exceeds $1,000 per year. There are exceptions for royalty income, interest income, and capital gains-related income from asset sales.

Operational income however is subject to UBTI.

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As energy opportunity programs are structured as partnerships for federal income tax purposes, this product will provide income tax related benefits to investors through pass through of depletion, intangible drilling cost and tangible equipment deductions.

Energy Opportunity Fund Programs Unlike drilling partnerships that focus upon the delivery of competitive investment year income tax benefits and opportunities for long-term cash through drilling, energy opportunity partnerships are structured to provide a non-traded investment opportunity that will focus upon a diverse universe of oil and gas assets that may include: (i) royalty interests in properties that produce hydrocarbons, (ii) working interests in oil and natural gas leases with undrilled locations or where hydrocarbon production may be enhanced through remedial operations, and (iii) infrastructure assets.8 The strategy of the energy opportunity partnership is to provide economic value to investors in the form of income and asset growth by: (i) focusing upon acquisitions of oil and gas properties and direct investments at a time when oil/gas market developments present opportunities for favorable purchase price valuations, and (ii) focusing upon properties that provide income and opportunities for value-

Similar to MLPs, the energy opportunity partnerships are structured to mitigate the liability exposure associated with oil and gas operationsrelated activities by offering limited partnership interests to investors.

added growth. While the energy opportunity partnership compares to the non-traded MLP designed product in the sense that both are seeking to deliver value to retail investors through strategic acquisitions of energy assets, energy opportunity partnerships assume a diversified investment mandate whereas the MLP will concentrate its assets in one sector of the energy industry (i.e., up-stream, down-stream, or mid-stream, but not all three sectors).

Similar to MLPs, the energy opportunity partnerships are structured to mitigate the liability exposure associated with oil and gas operations-related activities by offering limited partnership interests to investors. As energy opportunity programs are structured as partnerships for federal income tax purposes, this product will provide income tax related benefits to investors through pass through of depletion, intangible drilling cost and tangible equipment deductions.

As the investors in the energy opportunity partnerships will not have material participation in the partnership, they will be subject to passive activity limitations in relation to the income and deductions associated with the program investment activities, such as drilling and mid-stream or down-stream operations. In some cases, however, royalty revenues, interest payments on debt investments, and dividends from portfolio companies or projects structured as corporations may be treated as portfolio income as opposed to passive income. As is the case with nontraded MLP designed products, the tax consequences of UBTI will apply to operations-driven revenues for investors acquiring their interests with IRAs or other forms of qualified money. As is also the case with MLP designed products, accumulated unused passive deductions from energy opportunity partnerships can be used to offset passive income from other passive investments.

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While working interests in oil and gas leases and associated production can technically qualify for like-kind exchange treatment under IRC §1031 of the federal tax code, a majority of the assets acquired in these programs tend to be royalty interests (as income producing assets are generally favored by retail investors participating in the offerings).

In terms of program structure, the sponsor usually sets up an issuer entity structured as a limited liability company (“Issuer LLC”) that will acquire the minerals, royalties, and/or overriding royalties from a seller and that will take title to the assets.

Energy 1031 Programs A third acquisition-focused product structure in the syndicated energy program market offers opportunities for retail investors to acquire interests in energy properties through like-kind exchange transactions, allowing the investors to sell real estate and acquire interests in the program assets on a tax-deferred basis.9 In fact, many royalty programs offered within the non-traded retail sector have been §1031 programs. These programs are marketed to accredited investors through private placements conducted under Rule 506 of Regulation D. While working interests in oil and gas leases and associated production can technically qualify for like-kind exchange treatment under IRC §1031 of the federal tax code, a majority of the assets acquired in these programs tend to be royalty interests (as income producing assets are generally favored by retail investors participating in the offerings). As the underlying research and buying analytics involved in buying royalties tend to materially differ from those of an up-stream drilling company, this segment of the retail energy channel has been underserved in our opinion.

In terms of program structure, the sponsor usually sets up an issuer entity structured as a limited liability company (“Issuer LLC”) that will acquire the minerals, royalties, and/or overriding royalties from a seller and that will take title to the assets. The Issuer LLC eventually will transfer title to the retail investors of the 1031 program as money is raised. In many cases, the Issuer LLC will also reserve a right in the offering documents to conduct multiple closings during the offering period so the investors that want 1031 treatment can close on the investments at needed times to meet various IRS deadlines.

An affiliate of the program sponsor will fulfill the role of asset manager and will enter into an asset management agreement with each investor. While the nature of the investment is passive, investors are afforded the tax advantages associated with real estate as the program assets are titled directly to the investors. As the underlying investments are direct interests in real estate, investors will receive Form 1099s from the manager and will account for their pro rata share of the income and expenses on a Schedule C of the Form 1040. The subscription documents signed by investors contain special provisions that prohibit an investor from treating his/her investment as a partnership interest. Additionally, each investor must be given a right in the management agreement to terminate the sponsor’s status as the manager and to assume the asset management duties if he or she so chooses.

From a due diligence perspective, the investor group’s acquisition price should be based in substantial part upon what a reasonable buyer would pay for the properties (i.e., fair market value). At the end of day, investors should have a reasonable chance to earn high single digit to mid teens return on a load adjusted basis under average economic conditions.

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Due Diligence—Is the Program Positioned for Results? The due diligence requirement imposed upon broker-dealers is explained in greater detail in FINRA’s Regulatory Notice 10-22. Some areas of due diligence that we would highlight in relation to the previously mentioned non-traded investments would include the following: 1. Asset quality: Just because a program sponsor tells you that its investment strategy is an opportunistic one doesn’t always make it so. Targeted assets of the program must generally present ample opportunity to capture upside from price escalation and hydrocarbon reserve development.

2. One must analyze sponsor pro forma returns with conservativism, and one must not count on a quick return to better oil and natural gas prices in his analysis.

1— Energy Information Administration - Spot Prices, www.eia.gov.

3. Alignment of interests: While program managers must be reasonably paid to manage the

2— NASDAQ, U.S. Average Natural Gas Price, www.nasdaq.com.

administration of assets, a significant part of the sponsor’s compensation should be based upon production-based cash flows.

4. Performance/experience. Is the sponsor a “Johnny come lately” that thought it would be a great idea to syndicate an energy opportunity fund in a down market, or does the sponsor actually have personnel that have managed multiple opportunity/acquisition programs like the one being syndicated?

5. Defined investment process. Can the sponsor articulate an established process that it has used to source and evaluate oil and gas acquisitions in the past?

6. Commitment to accountability. Are the investors required to receive at least reviewed financials on an annual basis? Does the program give the investors as a group a practical right to remove the

3— National Association of Publicly Traded Partnerships – MLP Basics for Investors, www.naptp.org (website visited August 3, 2015).

4— Observations relating to the features of the energy investment products discussed herein were derived from the various due diligence engagements of Mick & Associates, P.C. over the past several years.

5— Robbie Whelan, What You Need to Know about Nontraded REITs, The Wall Street Journal (Aug. 27, 2014) (Nontraded REIT industry described as having $20 billion in investor capital raised annually).

6— Form D/A filed with Securities and Exchange Commission May 26, 2015.

manager if problems should occur down the road?

7— User’s Guide to Master Limited Partnerships, Vanguard (Sept. 2014).

7. Ability to get in the better deal. While this characteristic is not the easiest to measure, it can

8— Investing in Energy Programs, Investment Program Association (2014).

have a bearing on the quality of assets the fund procures. Project developers tend prefer to work with reputable sponsors that have shown an ability to access investor capital in the past. Project developers also prefer to work with sponsors that have an ability to provide meaningful input on

9— IRS Revenue Rulings 55-526, 68-331, 73-428, and 88-71 (stating that interests in oil and gas leaseholds, royalties, and overriding royalties can qualify for like-kid exchange treatment).

asset operational matters.

Conclusion Historically, non-traded energy program investments have accounted for $700-$800 million in retail investor sales over the past several years, with the largest segment of the capital being raised from companies that sponsor non-traded drilling programs through private placements. While lower oil prices present challenges to drillers, business may continue as usual for a few drilling sponsors that can make their projects work at lower price thresholds. Against the backdrop of lower oil and gas prices, however, one can also expect the acquisition/opportunity focused programs to assume a greater share of the nontraded retail energy product market in 2015 and future years.

While the oil and gas industry has been more resilient that what we have expected to date, the bull-pen is warming with companies eyeing future opportunities. Time will soon tell whether the newer breed of programs will make the impact we expect. ▲

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ADISA

News

Events

ADISA News & Events The following pages will update you on the 2015 Annual Conference & Trade Show, the Board Elections, and more! ➤

ADISA’s 2015 Annual Conference Tops the Charts ADISA brought together close to 1,000 professionals in the alternative investment industry for three days at its 2015 Annual Conference, held at The Cosmopolitan of Las Vegas, October 12-14.

According to ADISA’s president, Tom Voekler (Kaplan Voekler Cunningham & Frank PLC), intense planning went into the program, and it was viewed as ADISA’s effort to step up the game and solidify its position as the largest alternative investment professional gathering in the nation. Program Chair Angela Ahlholm Strauss (NoMax Group) indicated there were over 40 sessions of varying formats and topics for the audience to choose from.

“We couldn’t be happier with the success of ADISA’s 2015 Annual Conference, where we strive to deliver unparalleled education and networking opportunities to all members of the alternative investments industry,” said ADISA Executive Director and CEO John Harrison. “We analyzed the survey responses of the attendees—we track this every year in the same manner—and this may go down as the most well-received alternatives conference we’ve ever run. The overall weighted average on a scale of 5 was 4.36, with half of the respondents scoring the conference as 5 out of 5.”

Harrison noted that the response rate for this year’s survey was up as well, north of 20 percent, which he classified as good as far as event voluntary response surveys go. He added that further analysis indicated the best sessions, the most popular topics, and the like.

Things, he said, that were used from past conference surveys to make this year’s so successful. Topping the charts this year were topics such as the DOL Fiduciary Rule, new approaches to 15-02,

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ABOVE: Karl Rove delivered the Closing Keynote Speech BELOW: Mark Spitz along with Peter Ricchiuti (not pictured) were also Keynote Speakers.

research on 1031 Like-kind Exchanges, and the success of BDCs. The planning for such a conference begins years in advance, and the actual technical program is put together by both staff and volunteers from the industry. Many applicants to be on the program are turned away because of duplicate topics and the keen competition to be on the program. More than 20 percent of the program was innovative formats: interactive workshops, lectures, debates, presentations, and the like.

“We are most proud of our cutting edge session formats,” said Harrison, “We long ago grew out of only the moderator and three panelists set-up. That is good for some topics, but terrible for others. We aim to get the education factor right.” Harrison spent years in university administration and other industry associations before coming to ADISA. ▲

ADISA Honors Award Winners at Annual Conference ADISA honored the 2015 winners of the A Champion of Excellence (ACE), Distinguished Service and President’s Awards during the welcoming session at our 2015 Annual Conference.

The ACE Award, the highest honor bestowed on a member

by ADISA, was presented to Inland Private Capital. This award is given to an organization or individual that has reached a pinnacle in their career and has brought credit to themselves and ADISA through distinguished accomplishments.

The Distinguished Service Award is presented to individuals and companies who have provided exceptional service to ADISA, the alternative investments industry and the overall community. The 2015 Distinguished Service Award was presented to Barbara Halper, founding principal, president and chief executive officer of FR Consulting Services.

The 2015 President’s Award was presented to Hamilton Point Investments. The award is presented to an individual or organization that has made outstanding contributions in their chosen field, in service in local, state or national affairs, or in support of the advancement and continued excellence of ADISA. “We are pleased to honor Inland Private Capital, Barbara Halper and Hamilton Point Investments for their hard work and leadership in

TOP: Dione McConnell and Mary Jo Wenmouth of Inland Private Capital accept the ACE Award.

the arena of alternative investments,” said ADISA Executive Director

MIDDLE: Barbara Halper accepts the Distinguished Service Award.

and CEO John Harrison. “All of our award recipients have exhibited an honorable commitment to excellence and service to the industry while

BOTTOM: Matt Sharp of Hamilton Point Investments accepts the President’s Award.

adhering to the highest ethical standards and quality performance.” ▲

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ADISA Elects 2016 Board of Directors The ADISA membership has elected new directors to its 2016 board. The newly elected 2016 board members are: Brad Updike, Mick | Law Larry Lyons, Kalos Financial Mark Kosanke, Concorde Investment Services

Brad Updike

Larry Lyons

Mark Kosanke

Keith Lampi

Greg Mausz

Larry Sullivan

Keith Lampi, Inland Private Capital Corporation Greg Mausz, Preferred Apartment Communities Larry Sullivan, Passco Companies The new board members join the returning board members, who were elected in 2015 to two-year terms, and include: Mike Bendix, 2016 ADISA President, DFPG Investments Tom Voekler, ADISA’s Immediate Past President, Kaplan Voekler Cunningham & Frank John Grady, RCS Capital Corporation Catherine Bowman, The Bowman Law Firm Austin Dutton, BDA Bridge Valley Financial Peter Magnuson, Securities America Cory Neumiller, Capital Financial Services Darryl Steinhause, Ex-Officio, Legal Counsel, DLA Piper ADISA board elections occur in the fall; each director was elected to a two-year term through 2017. ▲

Attendees enjoy the 2015 ADISA Annual Conference & Trade Show in Las Vegas.

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Now Available: “The Guide to Alternative Investments” ADISA recently partnered with Lightbulb Press to publish an informative overview on alternative investments. “The Guide to Alternative Investments” provides a complete overview of the range of alternatives that are available to investors, including REITs

Spring Symposium

March 21-23, 2016 Manchester Grand Hyatt San Diego

and BDCs, energy and leasing programs, alternative mutual funds, private placements, and more.

The potential benefits of these investments for investors are explored in depth, with

Due Diligence Forum

July 12-13, 2016 Renaissance Boston Waterfront Hotel

discussions of diversification, income

streams,

and

tax

reduction tools. Also covered in the booklet is investor suitability, regulation, and the importance of pre-investment investigation as well as tracking alternative

Annual Conference & Trade Show

September 26-28, 2016 The Cosmopolitan of Las Vegas

investment performance.

To request a sample, please contact the ADISA office at adisa@adisa.org or 317.663.4180.

If you wish to order additional copies, please contact Lightbulb Press directly at info@lightbulbpress.com or 212.485.8822.

SAVE THE DATES FOR

2016

WINTER 2016 AI QUARTERLY

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10401 North Meridian Street Suite 202 Indianapolis, IN 46290

SAVE THE DATES FOR

2016

Spring Symposium March 21-23, 2016 Manchester Grand Hyatt San Diego Due Diligence Forum July 12-13, 2016 Renaissance Boston Waterfront Hotel Annual Conference & Trade Show September 26-28, 2016 The Cosmopolitan of Las Vegas