Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

In what seems to be a bow to the Trump Administration, FINRA has issued Regulatory Notice 17-14 which broadly seeks comments on FINRA rules that impact capital formation. Specific rules FINRA is seeking comment on include:

  • Capital Acquisition Broker Rules
  • Funding Portal Rules
  • Rule 2241 (Research Analysts and Research Reports)
  • Rule 2242 (Debt Research Analysts and Debt Research Reports)
  • Rule 2310 (Direct Participation Programs)
  • Rule 5110 (Corporate Financing Rule – Underwriting Terms and Arrangements)
  • Rule 5121 (Public Offerings of Securities With Conflicts of Interest)
  • Rule 5122 (Private Placement of Securities Issued by Members)
  • Rule 5123 (Private Placements of Securities)
  • Rule 5130 (Restrictions on the Purchase and Sale of Initial Public Equity Offerings)
  • Rule 5131 (New Issue Allocations and Distributions)
  • Rule 5141 (Sale of Securities in a Fixed Price Offering)
  • Rule 5150 (Fairness Opinions)
  • Rule 5160 (Disclosure of Price and Concessions in Selling Agreements)
  • Rule 5190 (Notification Requirements for Offering Participants)
  • Rule 5250 (Payments for Market Making)
  • Rule 6432 (Compliance with the Information Requirements of SEA Rule 15c2-11)
  • Trading Activity Fee (TAF)

Separately, in Regulatory Notice 17-15, FINRA is seeking comment on Rule 5110, known as the Corporate Financing Rule. Rule 5110 prohibits unfair underwriting arrangements in connection with the public offering of securities. The rule requires a FINRA member that participates in a public offering to file information with FINRA about the underwriting terms and arrangements. FINRA’s Corporate Financing Department reviews this information prior to the commencement of the offering to determine whether the underwriting compensation and other terms and arrangements meet the requirements of the applicable FINRA rules.

Some of the aspects of the proposed rule include:

  • FINRA is proposing to allow members more time to make the required filings with FINRA (from one business day after filing with the SEC or state equivalent to three business days).
  • The SEC’s Regulation S-K requires fees and expenses identified by FINRA as underwriting compensation to be disclosed in the prospectus. FINRA is proposing to modify the underwriting compensation disclosure requirements. Although the proposal would continue to require that a description of each item of underwriting compensation be disclosed, it would no longer require the disclosure to include the dollar amount ascribed to each individual item of compensation. FINRA is proposing to permit a firm to disclose the maximum aggregate amount of all underwriting compensation, except the discount or commission that must be disclosed on the cover page of the prospectus.
  • FINRA is proposing to clarify what is considered underwriting compensation for purposes of Rule 5110.
  • Subject to some exceptions, Rule 5110 requires a 180-day lock-up restriction on securities that are considered underwriting compensation. Because a prospectus may become effective long before the commencement of sales, FINRA proposes that the lock-up period begin on the date of commencement of sales (rather than the date of effectiveness of the prospectus).
  • Rule 5110 currently prescribes specific calculations for valuing convertible and nonconvertible securities received as underwriting compensation. However, applying these calculations can be time and resource intensive for both firms and FINRA. Rather than the specific calculations currently in the rule, FINRA is proposing in the Supplementary Material to instead allow valuing options, warrants and other convertible securities received as underwriting compensation based on a securities valuation method that is commercially available and appropriate for the type of securities to be valued (e.g., the Black-Scholes model for options).
  • FINRA is proposing to clarify the list of prohibited terms and arrangements in connection with a public offering of securities and eliminate from the list the prohibition of a nonaccountable expense reimbursement in excess of 3 percent of the offering proceeds.