By John Filar Atwood
As part of the initiative to review and modernize its operations and programs, the Financial Industry Regulatory Authority (FINRA) issued three notices seeking feedback on the capital formation process for broker-dealers. Together the three notices request comment on the effectiveness and efficiency of FINRA rules and processes governing broker-dealer activities related to the capital-raising process and their impact on capital formation.
In seeking to modernize its rules, FINRA noted the significant recent changes in the mechanisms companies use to raise capital through securities offerings. These include new rules to permit securities-based crowdfunding, updated the rules for exempt offerings under Regulation A and altered the requirements for Regulation D private offerings.
Steps already taken. In response, FINRA has taken steps to modernize its regulation of members’ participation in capital-raising activities, including the creation of the Capital Acquisition Broker (CAB) rule set, which allows members engaged in a limited range of corporate-financing activities to elect to be governed by a targeted set of rules.
In response to new crowdfunding provisions, FINRA created the funding portal rules, which are tailored to the limited scope of activities in which funding portals are permitted to engage under the JOBS Act and the SEC’s Regulation Crowdfunding. FINRA also amended Rule 5131 to create an important exception to facilitate firm compliance when allocating shares of a new issue to the accounts of unaffiliated private funds. Concurrent with the release of the three notices, FINRA is proposing amendments to Rule 5110, which prohibits unfair underwriting arrangements, to clarify and streamline its provisions.
Additional changes. FINRA is asking the public to comment on whether these new and amended rules are sufficient, or whether additional changes are needed to enhance the capital-raising process while ensuring investor protections. In Notice 17-14, FINRA requests feedback on the functioning of its rules that most directly apply to the capital-raising process and their effects on capital formation. FINRA noted that it welcomes comment on rules not mentioned in the release that might also impact capital formation.
In Notice 17-15, FINRA requests comment on proposed amendments to modernize, simplify and clarify FINRA Rule 5110. The rule applies to underwriting terms and arrangements regarding the public offering of securities. Notice 17-16 clarifies the application of FINRA’s research rules to desk commentary by sales and trading and principal trading personnel and solicits comments on a proposal to create a limited safe harbor for eligible desk commentary that may rise to the level of a research report. The proposed safe harbor would be subject to a number of compliance conditions to mitigate research-related conflicts, FINRA said.