FINRA has filed a rule proposal with the SEC to amend Rules 5110 (Corporate Financing Rule – Underwriting Terms and Arrangements) and 5121 (Public Offerings of Securities with Conflicts of Interest). Rule 5110 generally regulates underwriting compensation and prohibits unfair arrangements in connection with the public offering of securities. Among other provisions, Rule 5110 requires members to file with FINRA information about the securities offerings in which they participate and to disclose affiliations and other relationships that may indicate the presence of conflicts of interest. Rule 5121 generally provides that members with a conflict of interest may not participate in a public offering unless the member complies with certain prescribed disclosures or other protections.

FINRA is proposing amendments to Rule 5110 to:

  • narrow the scope of the definition of “participation or participating in a public offering;”
  • modify the lock-up restrictions to exclude certain securities acquired or converted to prevent dilution; and
  •  clarify that the information requirements apply only to relationships with a “participating” member.

FINRA also is proposing amendments to Rule 5121 to narrow the scope of the definition of “control.”

Definition of “Participation or Participating in a Public Offering”

FINRA is proposing to amend the definition of “participating in a public offering” to provide that an “independent financial adviser” that provides advisory or consulting services to an issuer would not be deemed to be “participating” in the public offering of an issuer’s securities. The amendments would define “independent financial adviser” as a member that provides advisory or consulting services to the issuer and that is neither engaged in, nor affiliated with any entity that is engaged in, the solicitation or distribution of the offering.

FINRA believes independent financial advisers are not in a position to extract unreasonable underwriting terms, arrangements or compensation from issuers.

Information Requirements Apply Only to Relationships with a “Participating” Member

Rule 5110(b)(6)(A)(iii) requires filers to disclose to FINRA information about the affiliation or association with any member of the officers, directors, and certain owners of the issuer. FINRA is proposing to amend Rule 5110(b)(6)(A)(iii) to reduce the scope of this provision from requiring disclosure about the affiliation or association of the specified parties with “any member” to “any participating member.” The compensation limitations and other provisions of Rule 5110 and Rule 5121 apply only to members that participate in a public offering. Consequently, affiliations of non-participating members would not present the type of concerns that the rule is designed to address, and requiring that information about these other members be filed with FINRA is unnecessary.