On April 15, 2017, the Financial Industry Regulatory Authority (“FINRA”) published Regulatory Notice 17-15, seeking comments on its proposed revisions to FINRA Rule 5110, which prohibits broker-dealers from being involved in unfair underwritings. The changes are, according to FINRA, designed to modernize the rule, first adopted in 1992 and updated last in 2004. The changes are in a number of areas, and we quote certain selected but not all provisions of the release below:
Filing Requirements: “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), clarify that a member participating in a filing is not required to file with FINRA if the filing is made by another member participating in the offering, and clarify and further reduce the types of documents and information that must be filed. In addition, rather than providing a non-exhaustive list of types of public offerings that are required to be filed, the proposed amendments would instead state that a public offering in which a member participates must be filed for review unless exempted by the rule.”
Filing Exemptions: “FINRA proposes to add to the list of offerings that are exempt from filing follow-on offerings of closed-end “tender offer” funds that routinely make self-tender offers and need to be in continuous distribution to offset net redemptions.”
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. ”
Underwriting Compensation: “The proposal would define “underwriting compensation” to mean “any payment, right, interest, or benefit received or to be received by a participating member from any source for underwriting, allocation, distribution, advisory and other investment banking services in connection with a public offering.” Underwriting compensation would also include “finder fees and underwriter’s counsel fees, including expense reimbursements and securities.” … The proposal would also modify and clarify exceptions from the term “underwriting compensation.””
Lock-Up Restrictions: “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).”
Valuation of Securities: “FINRA is proposing in the Supplementary Material to … 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).
Prohibited Terms and Arrangements: “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 non-accountable expense reimbursement in excess of 3 percent of the offering proceeds.”
Comments are due by May 30, 2017.