On January 11, 2011, the Financial Industry Regulatory Authority (“FINRA”) issued Regulatory Notice 11-04 (the “Notice”) proposing to expand FINRA Rule 5122 to govern all private placements in which a member firm participates—not just those in which the member firm (or its control entity) is the issuer—while retaining all but one of the existing exemptions, including those for offerings sold solely to certain institutions, qualified purchasers and other sophisticated investors. If the amendments are adopted, a member broker-dealer would be required to file the offering document for any private placement in which the member participates, subject to certain exemptions. The expanded rule would incorporate the broad definition of “participation” in FINRA Rule 5110, which corresponds to the types of services typically provided by a broker-dealer in a private placement. FINRA proposes to eliminate the existing exemption under FINRA Rule 5122(c) for offerings in which a member acts primarily in a wholesaling capacity. In making this proposal, FINRA referred to recent enforcement cases involving private placements in which a broker-dealer affiliated with an issuer acted primarily as the wholesaler, as an example of the need for more investor protection. Moreover, given that the proposed amendments expand the rule to reach all private placements, the reliance upon the efforts of an “independent” broker-dealer is no longer relevant. FINRA Rule 5122 would otherwise continue to exempt offerings to institutional accounts, qualified purchasers, qualified institutional buyers (QIBs), investment companies, banks and employees and affiliates of the issuer, as well as offerings under Rule 144A and Regulation S, and offerings of specified types of securities, including commodity pool interests and unregistered investment grade rated debt and preferred securities.
We note that most private placements of structured notes are likely to fall within one of the remaining exemptions. For example, a typical privately placed structured note will fall within the exemption for unregistered investment grade debt securities. In addition, private placements of trust-issued (special purpose entity) structured products, whether or not they satisfy the exemption for investment grade-rated debt and preferred securities, usually are sold to “qualified purchasers,” in order to avoid registration under the 1940 Act, and accordingly, will satisfy that exemption.