Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt New FINRA Rule 5123 (Private Placements of Securities), 65758-65763 [2011-27328]
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[Release No. 34–65585; File No. SR–FINRA–
2011–057]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of
Proposed Rule Change To Adopt New
FINRA Rule 5123 (Private Placements
of Securities)
October 18, 2011.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Exchange Act’’) 1 and Rule 19b–4
thereunder,2 notice is hereby given that
on October 5, 2011, Financial Industry
Regulatory Authority, Inc. (‘‘FINRA’’)
filed with the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’)
the proposed rule change as described
in Items I, II, and III below, which Items
1 15
2 17
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
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Federal Register / Vol. 76, No. 205 / Monday, October 24, 2011 / Notices
have been prepared by FINRA. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
FINRA is proposing to adopt FINRA
Rule 5123, which as described further
below, would require that members and
associated persons that offer or sell
applicable private placements (as
described in the Rule), or participate in
the preparation of private placement
memoranda (‘‘PPM’’), term sheets or
other disclosure documents in
connection with such private
placements, provide relevant
disclosures to each investor prior to sale
describing the anticipated use of
offering proceeds, and the amount and
type of offering expenses and offering
compensation. FINRA Rule 5123 also
would require that the PPM, term sheet
or other disclosure document, and any
exhibits thereto, be filed with FINRA no
later than 15 calendar days after the date
of the first sale, and any material
amendments to such document, or any
amendments to the disclosures
mandated by the Rule, be filed no later
than 15 calendar days after the date
such document is provided to any
investor or prospective investor, as
discussed further below.
The text of the proposed rule change
is available on FINRA’s Web site at
https://www.finra.org, at the principal
office of FINRA and for Web site
viewing and printing at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
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In its filing with the Commission,
FINRA included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. FINRA has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
FINRA is proposing to adopt new
Rule 5123 (Private Placements of
Securities) to ensure that investors in
private placements are provided
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detailed information about the intended
use of offering proceeds, the offering
expenses and offering compensation. In
addition, new Rule 5123 would provide
FINRA, through a member ‘‘notice’’
filing requirement, with more timely
and detailed information about the
private placement activities of member
firms.
Rule 5123(a) would prohibit a
member or person associated with a
member from offering or selling any
security conducted in reliance on an
available exemption from registration
under the Securities Act of 1933
(‘‘Securities Act’’) (‘‘private
placement’’), or participating in the
preparation of a PPM, term sheet or
other disclosure document for such
private placement, unless certain
conditions are met. In particular, the
member or associated person must
provide a PPM or term sheet to each
investor prior to sale that describes the
anticipated use of offering proceeds, the
amount and type of offering expenses,
and the amount and type of
compensation provided or to be
provided to sponsors, finders,
consultants, and members and their
associated persons in connection with
the offering. In addition, in a private
placement without a PPM or term sheet,
a member or person associated with a
member must prepare a document that
contains these disclosures and must
provide the document to each investor
prior to sale.
Proposed Rule 5123(b) would require
‘‘notice’’ filings of members’ private
placement activities. Specifically, the
proposed Rule would require
participating members to file the PPM,
term sheet or other disclosure document
(including exhibits) with FINRA no later
than 15 calendar days after the date of
first sale, and to file any material
amendments to such document, or any
amendments to the disclosures
mandated by the Rule, with FINRA no
later than 15 calendar days after the date
such document is provided to any
investor or prospective investor.
Proposed Rule 5123(c) would exempt
from the requirements of the Rule
several types of private placements.
Exemptions include offerings sold only
to any one or more of the following
purchasers:
• Institutional accounts, as defined in
NASD Rule 3110(c)(4); 3
3 The SEC approved SR–FINRA–2010–052,
which, when it becomes effective on December 5,
2011, will transfer the definition of ‘‘institutional
accounts’’ currently found in NASD Rule 3110(c)(4)
to FINRA Rule 4512(c). See Securities Exchange Act
Release No. 63784 (January 27, 2011), 76 FR 5850
(February 2, 2011) (Approving SR–FINRA–2010–
052); Regulatory Notice 11–19 (April 2011) (SEC
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• Qualified purchasers, as defined in
Section 2(a)(51)(A) of the Investment
Company Act;
• Qualified institutional buyers, as
defined in Securities Act Rule 144A;
• Investment companies, as defined
in Section 3 of the Investment Company
Act;
• An entity composed exclusively of
qualified institutional buyers, as defined
in Securities Act Rule 144A;
• Banks, as defined in Section 3(a)(2)
of the Securities Act; and
• Employees and affiliates of the
issuer.
In addition, the Rule would exempt
the following types of offerings:
• Offerings of exempted securities, as
defined by Section 3(a)(12) of the
Exchange Act;
• Offerings made pursuant to
Securities Act Rule 144A or SEC
Regulation S;
• Offerings of exempt securities with
short term maturities under Section
3(a)(3) of the Securities Act;
• Offerings of subordinated loans
under Exchange Act Rule 15c3–1,
Appendix D (see NASD Notice to
Members 02–32 (June 2002));
• Offerings of ‘‘variable contracts’’ as
defined in Rule 2320(b)(2);
• Offerings of modified guaranteed
annuity contracts and modified
guaranteed life insurance policies, as
referenced in Rule 5110(b)(8)(E);
• Offerings of non-convertible debt or
preferred securities by issuers that meet
the eligibility criteria for incorporation
by reference in Forms S–3 and F–3; 4
• Offerings of securities issued in
conversions, stock splits and
restructuring transactions that are
executed by an already existing investor
without the need for additional
consideration or investments on the part
of the investor;
• Offerings of securities of a
commodity pool operated by a
commodity pool operator as defined
under Section 1a(11) of the Commodity
Exchange Act; and
• Offerings filed with FINRA under
Rules 2310, 5110, 5121 and 5122.
These proposed exemptions are very
similar to the exemptions in existing
Rule 5122 (Member Private Offerings),
upon which proposed Rule 5123 is
Approves Consolidated FINRA Rules Governing
Books and Records). The text of proposed Rule 5123
will be amended to reflect this change after SR–
FINRA–2010–052 becomes effective.
4 FINRA notes that the Commission recently
adopted amendments to remove any references to
credit ratings from its rules and forms promulgated
under the Securities Act and the Exchange Act. See,
e.g., Security Ratings, Securities Act Release No.
9245 (July 27, 2011), 76 FR 46603 (August 3, 2011).
FINRA is proposing to use the references described
therein in the proposed rule change.
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based. The only differences in the
exemptions are that the current
proposed Rule would not exempt (1)
Offerings in which a member acts in a
wholesaling capacity and (2) offerings of
certain credit derivatives, both of which
are exempted from Rule 5122.5
Wholesaling is typically engaged in by
broker-dealers affiliated with the issuer,
and for reasons described in Section 5
below, FINRA does not intend to
incorporate that exemption into
proposed Rule 5123. The exemption for
offerings of equity and credit derivatives
was intended to avoid attributing
certain derivative products on
unaffiliated issuers as a ‘‘member
private offering.’’ However, since
proposed Rule 5123 would apply to all
offerings in which a member
participates, that distinction is not
relevant to Rule 5123.
Proposed Rule 5123 contains
provisions identical to those in current
Rule 5122 regarding confidential
treatment and application for
exemption. Pursuant to proposed
paragraph 5123(d), FINRA would accord
confidential treatment to all documents
and information filed pursuant to the
Rule, and would use such documents
and information solely for the purpose
of determining compliance with FINRA
rules or other applicable regulatory
purposes. Proposed paragraph 5123(e)
would provide members a method for
application for an exemption from the
provisions of the Rule for good cause
pursuant to the Rule 9600 Series.
FINRA will announce the
implementation date of the proposed
rule change no later than 90 days
following Commission approval. The
implementation date will be no more
than 180 days following Commission
approval.
2. Statutory Basis
FINRA believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(6) of the Exchange
Act,6 which requires, among other
things, that FINRA rules must be
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, and, in general, to protect
investors and the public interest. The
proposed rule change will provide
investors in private placements with
detailed information about the intended
use of offering proceeds, the offering
expenses and offering compensation. In
addition, the proposed rule change will
5 The proposed rule change also would, as noted
supra at note 4, replace references to credit ratings
with alternative language.
6 15 U.S.C. 78o–3(b)(6).
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provide FINRA with more timely and
detailed information about the private
placement activities of member firms.
As a result, FINRA believes that
ensuring that investors have information
about private placements will provide
important investor protections in
connection with private placements
without unduly restricting capital
formation through the private placement
offering process. In addition, FINRA
believes that the proposed rule change
will assist its efforts to identify
problematic terms and conditions in
private placements, thereby helping to
detect and prevent fraud in connection
with private placements.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
FINRA does not believe that the
proposed rule change will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Exchange Act.
The proposed rule change requires that
members and associated persons
provide relevant disclosures to each
investor prior to the sale of applicable
private placements, and file disclosure
documents with FINRA no later than 15
calendar days after the date of the first
sale (or, in the case of material
amendments, the date provided to an
investor or prospective investor). As
noted above, FINRA does not believe
that the proposed rule change will
unduly restrict capital formation
through the private placement offering
process. FINRA believes that the
relatively modest ‘‘burden’’ of the
proposed rule change is both necessary
and appropriate in helping to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, and, in general, to
protect investors and the public interest.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
In January 2011, FINRA published
Regulatory Notice 11–04 requesting
comment on proposed amendments to
expand Rule 5122 (the ‘‘11–04
Proposal’’). A copy of the Notice is
available on FINRA’s Web site at http:
//www.finra.org. The comment period
expired on March 14, 2011. FINRA
received 35 comments in response to
the Notice. A list of the commenters and
abbreviations that were received in
response to the Notice are attached as
Exhibit A, and copies of the comment
letters received in response to the Notice
are available on FINRA’s Web site at
https://www.finra.org. A summary of the
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comments and FINRA’s response is
provided below.
The 11–04 Proposal
The 11–04 Proposal would have
extended virtually all of the existing
requirements of Rule 5122, i.e., those
requiring disclosure, filing and
limitations on the use of offering
proceeds, to all private placements in
which a member participates (subject to
the listed exemptions). While many
commenters expressed support for the
11–04 Proposal,7 many, as discussed
below, were critical of various
provisions. Most criticisms concerned
proposed requirements regarding the
use of offering proceeds and filing.
FINRA has considered the comments
received in response to the 11–04
Proposal. The proposed rule change
balances the goals of ensuring investors
and FINRA receive key information
about private placements while
maintaining the flexibility and
expediency offered by private
placements. Based on these
considerations, the current proposed
rule change differs in several key
respects from the 11–04 Proposal.
Comments Regarding Use of Offering
Proceeds
The issue generating the most
comment was the proposed use of
proceeds limitation (i.e., the proposed
requirement that 85 percent of the
proceeds raised be used for the business
purposes described in the disclosure
document). Many commenters
expressed concerns about the ability of
members to monitor an issuer’s use of
proceeds and the Rule’s potential for
additional liability if the use of proceeds
deviates from that provided in the
required disclosure document.8 Some
raised concerns that, as written, the
proposed Rule would impose burdens
on or attempt to regulate non-FINRA
members.9
Some commenters asserted the
proposed 85 percent limitation was an
arbitrary ‘‘one size fits all’’ approach
and could be a barrier to capital
formation, especially for smaller
offerings or other specific types of
offerings.10 Commenters suggested that
the fixed costs of smaller offerings, or
higher cost of specific types of offerings,
7 See, e.g., letters from Cornell, FSI, Intellivest
Securities, Mick & Associates, NIBA and WSI.
8 See letters from 3PM, ABA, AOG, George, IPA,
NYC Bar, NY State Bar, NIBA, Secore & Waller,
SIFMA and Sullivan & Cromwell.
9 See letters from ABA, NYC Bar, Patrick, Saxony,
SIFMA and Sullivan & Cromwell.
10 See letters from ABA, AOG, BFS, FSI, George,
IMS, IPA, NY State Bar, Patrick, Rothwell
Consulting, Saxony, Schulten Ward, Secore &
Waller, WSI and Weinstein Smith.
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could make this limitation unworkable.
A few commenters feared that
constraints on the allowable expenses
for such offerings could force issuers to
explore alternative means of raising
capital without the assistance of
member firms, including the use of
finders and unregistered persons.11 In
addition, commenters raised
interpretive questions regarding
whether certain expenses—including,
among other things, costs relating to due
diligence, legal, travel, blue sky, stock
grants, warrants, tail fees, rights of first
refusal, conference expenses, trail fees,
management fees and appraisals and
valuations—would be required to be
treated as ‘‘offering expenses’’ or would
constitute proceeds used for business
purposes.12
Some commenters recommended that
FINRA simply require greater
disclosures about the various uses of
proceeds, offering expenses, and
compensation as an alternative to
adopting a use of offering proceeds
limitation.13 Based in large part on these
comments, as discussed above, FINRA
has amended the proposal such that it
no longer includes the substantive
requirement that at least 85 percent of
offering proceeds must be used for the
disclosed business purposes and has
instead chosen to reorient the Rule
towards disclosure.
While FINRA continues to believe
that the manner in which offering
proceeds are used is critically important
in a private placement—and that
offerings in which a large percentage of
offering proceeds are for other than
business purposes raise regulatory
concerns—FINRA believes that these
concerns can be addressed through the
obligations of broker-dealers, under the
suitability and anti-fraud provisions of
the securities laws and FINRA rules, to
conduct a reasonable inquiry of an
issuer.14 FINRA appreciates the
importance of raising capital in the
private placement market for certain
issuers and recognizes commenters’
concerns that an across-the-board
application of the 85 percent
requirement may impose unnecessary
burdens on some offerings, especially
smaller private placements. FINRA’s
expectation is that the reasonable
inquiry obligations of broker-dealers
11 See letters from ABA, Krieger & Prager and
REISA.
12 See letters from ABA, IMS, Locke Lord, Mick
& Associates, Network 1, Patrick, REISA, Saxony,
Secore & Waller, SIFMA, Sullivan & Cromwell and
Weinstein Smith.
13 See letters from FSI, IPA, NIBA, REISA and
WSI.
14 See Regulatory Notice 10–22 (April 2010)
(Regulation D Offerings).
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will encourage reasonable limits on the
use of offering proceeds for purposes
other than generating a return on
investment.15 If the rigorous application
of the reasonable inquiry obligations
outlined in Regulatory Notice 10–22
does not achieve this result, FINRA will
reconsider the imposition of numerical
limitations. In addition, eliminating the
85 percent requirement will simplify the
administration of the Rule by removing
the need for members to determine
whether various expenses would have
been classified as ‘‘offering expenses,’’
‘‘compensation,’’ or ‘‘business
purposes’’ under the Rule. In the public
offering context, FINRA’s Corporate
Financing Department staff’s review
process in connection with issuing a
‘‘no-objections’’ opinion ensures
consistent and accurate treatment of
various expenses. Since only a ‘‘notice’’
filing is required in proposed Rule 5123,
the lack of staff review and comment
could raise interpretive questions
regarding the application of the 85
percent requirement if the provision
remained in the Rule. Lastly,
eliminating the 85 percent requirement
would eliminate any implication, as
indicated by some comments, that the
11–04 Proposal would create an
independent, continuing obligation for
members to monitor an unaffiliated
issuer’s use of proceeds after the closing
of an offering.
Comments Regarding Filing
Requirements
The 11–04 Proposal would have
required a member to file information
with FINRA by the time an offering
document is provided to any investor.
While the 11–04 Proposal states that
offerings would not be held in abeyance
15 Members have an obligation to conduct a
reasonable inquiry regarding the use of proceeds
prior to making a recommendation in that security.
See, e.g., Regulatory Notice 10–22 (regarding private
placements). Such a recommendation would not
comply with the requirements of FINRA’s
suitability rule if the description of the use of
proceeds in the disclosure document is inconsistent
with the information obtained in the course of this
inquiry. See NASD Rule 2310 (Recommendations to
Customers (Suitability)). FINRA notes that the SEC
has approved new FINRA Rule 2111 (Suitability).
See Regulatory Notice 11–02 (January 2011) (SEC
Approves Consolidated FINRA Rules Governing
Know-Your-Customer and Suitability Obligations).
See also Securities Exchange Act Release No. 63325
(November 17, 2010), 75 FR 71479 (November 23,
2010) (File No. SR–FINRA–2010–039; Order
Granting Accelerated Approval, As Modified by
Amendment, to Proposed Rule Change to Adopt
FINRA Rules 2090 (Know Your Customer) and 2111
(Suitability) in the Consolidated FINRA Rulebook);
Securities Exchange Act Release No. 64260 (April
8, 2011), 76 FR 20759 (April 13, 2011) (File No. SR–
FINRA–2011–016; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change to Delay the
Implementation Date of FINRA Rule 2090 (Know
Your Customer) and FINRA Rule 2111 (Suitability)).
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pending FINRA staff review and that
filings would not be ‘‘approved’’ nor
would the staff issue ‘‘no-objections’’
opinions, commenters raised concerns
about potential slowdowns of offerings
due to the filing requirement. Several
commenters believed that the 11–04
Proposal’s filing requirement could
delay the offering process as firms
would be reluctant to proceed with an
offering without assurances or
clearances from FINRA.16 Commenters
also raised technical concerns about the
proposed filing process, including
concerns regarding who must file (e.g.,
each selling dealer in a private
placement), how members of a selling
group would know if an offering
memorandum had been previously
filed, and who bears the responsibility
to file amendments.17 A few
commenters, including the NYC Bar,
suggested that the application of the
filing requirement would result in
offerings structured to avoid application
of the Rule, either by limiting the
offering to exempted investors or
moving the transaction offshore.
In response to these comments,
FINRA now proposes to require that a
member file ‘‘no later than 15 calendar
days after the date of first sale.’’ This
timing requirement is the same as the
filing requirement for Form D;
synchronizing these timing
requirements may allow some filers to
utilize operational efficiencies.
Moreover, by requiring a ‘‘notice’’ filing,
FINRA will remove any implication that
the FINRA staff will provide comments
on a filing; that such filing with FINRA
could be a precondition to commencing
an offering; or that members should
expect to receive any FINRA staff input
before proceeding with an offering. The
proposed filing requirement would
nevertheless provide FINRA staff with
timely access to information about the
private placement business of FINRA
members.
The proposal would require that each
member that participates in a private
placement make the requisite filing.
FINRA had considered requiring only
one member to file, but determined that
such a requirement would limit its
ability to gain timely access to
information about the private placement
business of FINRA members that might
not file. Moreover, as the comment
letters indicate, requiring only one
member to file would complicate the
ability of the other members to
16 See letters from ABA, Achates, IMS, Intellivest,
IPA, George, LeGaye, Network 1, NIBA, NYC Bar,
NY State Bar, Patrick, REISA, Saxony, Secore &
Waller and Sullivan & Cromwell.
17 See letters from Achates, FSI and Moloney.
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participate, since they would have to
determine whether another member had
filed and whether the filing complies
with FINRA’s requirements. If one
member engaged in the private
placement under different
compensation terms than another
member, then it could further
complicate such a single-filer regime.
Therefore, it is more practical, and more
helpful to FINRA’s need for timely
access to information about the private
placement business of members, to
require every member that participates
in a particular private placement to
make the notice filing.
Other Comments
Comments regarding disclosure
ranged from support 18 to requests for
clarification or guidance regarding what
would constitute adequate disclosure 19
to claims that disclosure would be
duplicative of that provided to the SEC
pursuant to Regulation D.20 Some
requested clarification of specific types
of disclosure (e.g., sponsor fees,21 nonvariable third party costs 22 or the scope
of offering expenses 23).
Several commenters suggested
narrowing the scope of the Rule through
additional exemptions, including
adding exemptions for offers and sales
to: all accredited investors; 24 small
groups of accredited investors; 25 or
alternatively a de minimis exemption
for sales to accredited investors; 26 other
registered broker-dealers in connection
with the establishment of a joint back
office arrangement; 27 issuers that are
reporting companies under the Federal
securities laws; 28 knowledgeable
employees or officers of the issuing
company; 29 or when there is a change
in ownership.30 Others argued that
exemptions for the following types of
securities should be added: insurance
contracts; 31 mergers and acquisitions
structured as a stock sale either for cash
or for acquirer stock; 32 secondary sales
of securities; 33 and privately offered
18 See,
e.g., letter from WSI.
e.g., letter from LeGaye.
20 See letter from NY State Bar.
21 See letter from AOG.
22 See letter from Weinstein Smith.
23 See letters from IMS and Weinstein Smith.
24 See letters from NYC Bar, SIFMA, Sullivan &
Cromwell and Weinstein Smith.
25 See letter from LeGaye.
26 See letters from ABA, IMS, NYC Bar, Rothwell
Consulting, SIFMA, St. Charles and Sullivan &
Cromwell.
27 See letter from ABA.
28 See letter from SIFMA.
29 See letters from ABA, SIFMA and St. Charles.
30 See letter from IMS.
31 See letter from Sutherland.
32 See letter from NYC Bar.
33 See letter from Sullivan & Cromwell.
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commodity pools and investment
funds.34
FINRA believes the exemptions in the
proposed rule change are appropriately
tailored and inclusive, and as noted
above, are very similar to those in
existing Rule 5122. Based upon its
experience with Rule 5122, FINRA does
not believe it should expand the list of
exemptions. Further, FINRA notes that
the proposed Rule would provide a
method by which a member may apply
for an exemption from the provisions of
the Rule for good cause pursuant to the
Rule 9600 Series.
Some commenters supported FINRA’s
proposal not to incorporate the
wholesaling exemption into the Rule,35
while others questioned the elimination
of this exemption, especially as the 11–
04 Proposal would have eliminated the
exemption for member private offerings
as well as private placements more
generally.36 The basis for this
exemption in Rule 5122 was that
distribution of the private placement by
independent retail broker-dealers would
obviate the need for the rule, which
applies to private placements in which
the selling member or its control entity
is the issuer. However, given that the
current proposed rule change reaches all
private placements, the reliance upon
the efforts of an ‘‘independent’’ brokerdealer is no longer relevant.
Accordingly, the wholesaling exemption
is not provided in proposed Rule 5123.
Commenters also requested that the
Rule (or supplementary material) state
that the exemption provisions may be
combined without triggering the
requirements of the Rule.37 FINRA notes
that the exemption provisions may be
combined. These exemptions are
derived from those in Rule 5122. In
announcing the approval of Rule 5122,
FINRA stated as follows:
Types of exemptions may be combined
without triggering the requirements of the
rule. For example, if an MPO is offered to
both qualified purchasers and employees or
affiliates of the issuer or its control entities,
as long as these purchasers qualify for
exemptions under the rule, the MPO would
be exempt from the rule’s requirements.38
FINRA would make a similar statement
in connection with a Regulatory Notice
regarding this Rule.
One commenter raised a concern that,
as proposed, the Rule would not afford
confidential treatment to any comment
34 See
letter from MFA.
letters from Cornell, NIBA and SIFMA.
36 See letters from 3PM, LeGaye, SIFMA and WSI.
35 See
37 See letters from ABA, NYC Bar, Rothwell
Consulting and SIFMA.
38 See Regulatory Notice 09–27 (May 2009)
(Member Private Offerings).
PO 00000
Frm 00082
Fmt 4703
Sfmt 4703
or similar letters by FINRA, and thus
they could be discovered by a litigant
through appropriate legal action.39
FINRA believes that proposed paragraph
5123(d) addresses this issue and would
afford confidential treatment to all such
documents.
As a result of the differences between
the 11–04 Proposal (and Rule 5122) and
the current proposed Rule, as described
above, FINRA is proposing that the rule
regarding private placements be a new
rule separate from Rule 5122.40
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
shall: (a) By order approve or
disapprove such proposed rule change,
or (b) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Exchange
Act. The Commission specifically
requests comment on the following:
• Whether the proposed rule would
impact issuers’ access to capital via the
private placement market, particularly
small issuers. If so, how?
• Whether the proposed rule would
impact investors purchasing private
placement securities through a brokerdealer subject to the new rule. If so,
how? For example, would knowledge of
the information contained in a
mandatory disclosure improve an
investor’s ability to decide whether to
invest in a private placement subject to
the rule?
• Whether the proposed rule would
impact registered broker-dealers’
participation in private placements. If
so, how?
Comments may be submitted by any
of the following methods:
39 See
letter from ABA.
believes that the provisions of existing
Rule 5122 are appropriate for the types of private
offerings covered by that rule, i.e., the offering of
securities issued by a member or its control affiliate.
In addition, FINRA is not aware of any concerns
regarding the timing of Rule 5122’s filing
requirement.
40 FINRA
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3. AOG Wealth Management (March
14, 2011) (‘‘AOG’’).
4. Balanced Financial Securities
(February 12, 2011) (‘‘BFS’’).
5. Colonnade Securities LLC (March
10, 2011) (‘‘Colonnade’’).
6. Cornell University Law School
(March 14, 2011) (‘‘Cornell’’).
7. Financial Services Institute (March
Paper Comments
15, 2011) (‘‘FSI’’).
8. Ken George (March 14, 2011)
• Send paper comments in triplicate
(‘‘George’’).
to Elizabeth M. Murphy, Secretary,
9. Integrated Management Solutions
Securities and Exchange Commission,
USA LLC (March 14, 2011) (‘‘IMS’’).
100 F Street, NE., Washington, DC
10. Investment Program Association
20549–1090.
(March 14, 2011) (‘‘IPA’’).
All submissions should refer to File
11. Intellivest Securities, Inc. (March
Number SR–FINRA–2011–057. This file 10, 2011) (‘‘Intellivest Securities’’).
number should be included on the
12. Krieger & Prager, LLP (February
subject line if e-mail is used. To help the 18, 2011) (‘‘Krieger & Prager’’).
Commission process and review your
13. The LeGaye Law Firm P.C. (March
comments more efficiently, please use
14, 2011) (‘‘LeGaye’’).
only one method. The Commission will
14. Valerie Lewis (January 19, 2011)
post all comments on the Commission’s (‘‘Lewis’’).
Internet Web site (https://www.sec.gov/
15. Locke Lord Bissell & Liddell LLP
rules/sro.shtml). Copies of the
(March 11, 2011) (‘‘Locke Lord’’).
submission, all subsequent
16. Moloney Securities Co., Inc.
amendments, all written statements
(March 7, 2011) (‘‘Moloney’’).
with respect to the proposed rule
17. Managed Funds Association
change that are filed with the
(March 14, 2011) (‘‘MFA’’).
Commission, and all written
18. Mick & Associates, P.C., LLO
communications relating to the
(March 10, 2011) (‘‘Mick & Associates’’).
19. National Investment Banking
proposed rule change between the
Commission and any person, other than Association (March 14, 2011) (‘‘NIBA’’).
20. Network 1 Financial Securities,
those that may be withheld from the
Inc. (March 10, 2011) (‘‘Network 1’’).
public in accordance with the
21. New York City Bar Association
provisions of 5 U.S.C. 552, will be
(March 14, 2011) (‘‘NYC Bar’’).
available for Web site viewing and
22. New York State Bar Association
printing in the Commission’s Public
(March 28, 2011) (‘‘NY State Bar’’).
Reference Room, 100 F Street, NE.,
23. Patrick Capital Markets, LLC
Washington, DC 20549, on official
(March 14, 2011) (‘‘Patrick’’).
business days between the hours of 10
24. Real Estate Investment Securities
a.m. and 3 p.m. Copies of such filing
also will be available for inspection and Association (March 14, 2011)
(‘‘REISA’’).
copying at the principal office of
25. Rothwell Consulting LLC (March
FINRA. All comments received will be
posted without change; the Commission 1, 2011) (‘‘Rothwell Consulting’’).
26. Saxony Securities, Inc. (March 14,
does not edit personal identifying
2011) (‘‘Saxony’’).
information from submissions. You
27. Schulten, Ward & Turner
should submit only information that
(February 3, 2011) (‘‘Schulten Ward’’).
you wish to make available publicly. All
28. Secore & Waller, L.L.P. (March 14,
submissions should refer to File
2011) (‘‘Secore & Waller’’).
Number SR–FINRA–2011–057 and
29. Securities Industry and Financial
should be submitted on or before
Markets Association (March 14, 2011)
November 14, 2011.
(‘‘SIFMA’’).
For the Commission, by the Division of
30. St. Charles Capital, LLC (March
Trading and Markets, pursuant to delegated
14, 2011) (‘‘St. Charles’’).
41
authority.
31. Sullivan & Cromwell LLP (March
Elizabeth M. Murphy,
14, 2011) (‘‘Sullivan & Cromwell’’).
Secretary.
32. Sutherland Asbill & Brennan LLP
(March 14, 2011) (‘‘Sutherland’’).
Exhibit A
33. Third Party Marketers Association
(March 10, 2011) (‘‘3PM’’).
Alphabetical List of Written Comments
34. Walton Securities, Inc. (March 14,
1. Achates Capital Advisors LLC
2011) (‘‘WSI’’).
(March 4, 2011) (‘‘Achates’’).
35. Weinstein Smith LLP (March 9,
2. American Bar Association (March
2011) (‘‘Weinstein Smith’’).
14, 2011) (‘‘ABA’’).
tkelley on DSK3SPTVN1PROD with NOTICES
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–FINRA–2011–057 on the
subject line.
[FR Doc. 2011–27328 Filed 10–21–11; 8:45 am]
41 17
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65763
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–65588; File No. SR–ICC–
2011–01]
Self-Regulatory Organizations; ICE
Clear Credit LLC; Order Approving
Proposed Rule Change To Add Rules
Related to the Clearing of Emerging
Markets Sovereigns
October 18, 2011.
I. Introduction
On August 30, 2011, ICE Clear Credit
LLC (‘‘ICC’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change SR–ICC–2011–01 pursuant to
Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder.2 The proposed rule
change was published for comment in
the Federal Register on September 9,
2011.3 The Commission received no
comment letters regarding the proposal.
For the reasons discussed below, the
Commission is granting approval of the
proposed rule change.
II. Description
This rule change will amend Chapter
26 of ICC’s rules to add Sections 26D
and 26E to provide for the clearance of
Emerging Markets Standard Sovereign
CDS Contracts (‘‘SES Contracts’’). ICC
will clear SES Contracts on four
sovereign reference entities: the
Federative Republic of Brazil, the
United Mexican States, the Bolivian
Republic of Venezuela, and the
Argentine Republic. If ICC determines to
list additional SES Contracts, it will
seek approval from the Commission for
such contracts (or for a class of product
including such contracts) by a
subsequent filing with the Commission.
SES Contracts have similar terms to
the North American Corporate CDS
Contracts (‘‘Corporate Single Name CDS
Contracts’’) currently cleared by ICC and
governed by Section 26B of the ICC
rules. Accordingly, proposed rules in
Section 26D largely mirror the ICC rules
for Corporate Single Name CDS
Contracts in Section 26B, with certain
modifications that reflect differences in
terms and market conventions between
SES Contracts and Corporate Single
Name CDS Contracts. In the event that
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Securities Exchange Act Release No. 34–65259
(September 2, 2011), 76 FR 55984 (September 9,
2011). In its filing with the Commission, ICC
included statements concerning the purpose of and
basis for the proposed rule change. The text of these
statements are incorporated into the discussion of
the proposed rule change in Section II below.
2 17
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]]>Agencies
[Federal Register Volume 76, Number 205 (Monday, October 24, 2011)]
[Notices]
[Pages 65758-65763]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-27328]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-65585; File No. SR-FINRA-2011-057]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt New
FINRA Rule 5123 (Private Placements of Securities)
October 18, 2011.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby
given that on October 5, 2011, Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items
[[Page 65759]]
have been prepared by FINRA. The Commission is publishing this notice
to solicit comments on the proposed rule change from interested
persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to adopt FINRA Rule 5123, which as described
further below, would require that members and associated persons that
offer or sell applicable private placements (as described in the Rule),
or participate in the preparation of private placement memoranda
(``PPM''), term sheets or other disclosure documents in connection with
such private placements, provide relevant disclosures to each investor
prior to sale describing the anticipated use of offering proceeds, and
the amount and type of offering expenses and offering compensation.
FINRA Rule 5123 also would require that the PPM, term sheet or other
disclosure document, and any exhibits thereto, be filed with FINRA no
later than 15 calendar days after the date of the first sale, and any
material amendments to such document, or any amendments to the
disclosures mandated by the Rule, be filed no later than 15 calendar
days after the date such document is provided to any investor or
prospective investor, as discussed further below.
The text of the proposed rule change is available on FINRA's Web
site at https://www.finra.org, at the principal office of FINRA and for
Web site viewing and printing at the Commission's Public Reference
Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
FINRA is proposing to adopt new Rule 5123 (Private Placements of
Securities) to ensure that investors in private placements are provided
detailed information about the intended use of offering proceeds, the
offering expenses and offering compensation. In addition, new Rule 5123
would provide FINRA, through a member ``notice'' filing requirement,
with more timely and detailed information about the private placement
activities of member firms.
Rule 5123(a) would prohibit a member or person associated with a
member from offering or selling any security conducted in reliance on
an available exemption from registration under the Securities Act of
1933 (``Securities Act'') (``private placement''), or participating in
the preparation of a PPM, term sheet or other disclosure document for
such private placement, unless certain conditions are met. In
particular, the member or associated person must provide a PPM or term
sheet to each investor prior to sale that describes the anticipated use
of offering proceeds, the amount and type of offering expenses, and the
amount and type of compensation provided or to be provided to sponsors,
finders, consultants, and members and their associated persons in
connection with the offering. In addition, in a private placement
without a PPM or term sheet, a member or person associated with a
member must prepare a document that contains these disclosures and must
provide the document to each investor prior to sale.
Proposed Rule 5123(b) would require ``notice'' filings of members'
private placement activities. Specifically, the proposed Rule would
require participating members to file the PPM, term sheet or other
disclosure document (including exhibits) with FINRA no later than 15
calendar days after the date of first sale, and to file any material
amendments to such document, or any amendments to the disclosures
mandated by the Rule, with FINRA no later than 15 calendar days after
the date such document is provided to any investor or prospective
investor.
Proposed Rule 5123(c) would exempt from the requirements of the
Rule several types of private placements. Exemptions include offerings
sold only to any one or more of the following purchasers:
Institutional accounts, as defined in NASD Rule
3110(c)(4); \3\
---------------------------------------------------------------------------
\3\ The SEC approved SR-FINRA-2010-052, which, when it becomes
effective on December 5, 2011, will transfer the definition of
``institutional accounts'' currently found in NASD Rule 3110(c)(4)
to FINRA Rule 4512(c). See Securities Exchange Act Release No. 63784
(January 27, 2011), 76 FR 5850 (February 2, 2011) (Approving SR-
FINRA-2010-052); Regulatory Notice 11-19 (April 2011) (SEC Approves
Consolidated FINRA Rules Governing Books and Records). The text of
proposed Rule 5123 will be amended to reflect this change after SR-
FINRA-2010-052 becomes effective.
---------------------------------------------------------------------------
Qualified purchasers, as defined in Section 2(a)(51)(A) of
the Investment Company Act;
Qualified institutional buyers, as defined in Securities
Act Rule 144A;
Investment companies, as defined in Section 3 of the
Investment Company Act;
An entity composed exclusively of qualified institutional
buyers, as defined in Securities Act Rule 144A;
Banks, as defined in Section 3(a)(2) of the Securities
Act; and
Employees and affiliates of the issuer.
In addition, the Rule would exempt the following types of
offerings:
Offerings of exempted securities, as defined by Section
3(a)(12) of the Exchange Act;
Offerings made pursuant to Securities Act Rule 144A or SEC
Regulation S;
Offerings of exempt securities with short term maturities
under Section 3(a)(3) of the Securities Act;
Offerings of subordinated loans under Exchange Act Rule
15c3-1, Appendix D (see NASD Notice to Members 02-32 (June 2002));
Offerings of ``variable contracts'' as defined in Rule
2320(b)(2);
Offerings of modified guaranteed annuity contracts and
modified guaranteed life insurance policies, as referenced in Rule
5110(b)(8)(E);
Offerings of non-convertible debt or preferred securities
by issuers that meet the eligibility criteria for incorporation by
reference in Forms S-3 and F-3; \4\
---------------------------------------------------------------------------
\4\ FINRA notes that the Commission recently adopted amendments
to remove any references to credit ratings from its rules and forms
promulgated under the Securities Act and the Exchange Act. See,
e.g., Security Ratings, Securities Act Release No. 9245 (July 27,
2011), 76 FR 46603 (August 3, 2011). FINRA is proposing to use the
references described therein in the proposed rule change.
---------------------------------------------------------------------------
Offerings of securities issued in conversions, stock
splits and restructuring transactions that are executed by an already
existing investor without the need for additional consideration or
investments on the part of the investor;
Offerings of securities of a commodity pool operated by a
commodity pool operator as defined under Section 1a(11) of the
Commodity Exchange Act; and
Offerings filed with FINRA under Rules 2310, 5110, 5121
and 5122.
These proposed exemptions are very similar to the exemptions in
existing Rule 5122 (Member Private Offerings), upon which proposed Rule
5123 is
[[Page 65760]]
based. The only differences in the exemptions are that the current
proposed Rule would not exempt (1) Offerings in which a member acts in
a wholesaling capacity and (2) offerings of certain credit derivatives,
both of which are exempted from Rule 5122.\5\ Wholesaling is typically
engaged in by broker-dealers affiliated with the issuer, and for
reasons described in Section 5 below, FINRA does not intend to
incorporate that exemption into proposed Rule 5123. The exemption for
offerings of equity and credit derivatives was intended to avoid
attributing certain derivative products on unaffiliated issuers as a
``member private offering.'' However, since proposed Rule 5123 would
apply to all offerings in which a member participates, that distinction
is not relevant to Rule 5123.
---------------------------------------------------------------------------
\5\ The proposed rule change also would, as noted supra at note
4, replace references to credit ratings with alternative language.
---------------------------------------------------------------------------
Proposed Rule 5123 contains provisions identical to those in
current Rule 5122 regarding confidential treatment and application for
exemption. Pursuant to proposed paragraph 5123(d), FINRA would accord
confidential treatment to all documents and information filed pursuant
to the Rule, and would use such documents and information solely for
the purpose of determining compliance with FINRA rules or other
applicable regulatory purposes. Proposed paragraph 5123(e) would
provide members a method for application for an exemption from the
provisions of the Rule for good cause pursuant to the Rule 9600 Series.
FINRA will announce the implementation date of the proposed rule
change no later than 90 days following Commission approval. The
implementation date will be no more than 180 days following Commission
approval.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Exchange Act,\6\ which requires,
among other things, that FINRA rules must be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, and, in general, to protect investors
and the public interest. The proposed rule change will provide
investors in private placements with detailed information about the
intended use of offering proceeds, the offering expenses and offering
compensation. In addition, the proposed rule change will provide FINRA
with more timely and detailed information about the private placement
activities of member firms. As a result, FINRA believes that ensuring
that investors have information about private placements will provide
important investor protections in connection with private placements
without unduly restricting capital formation through the private
placement offering process. In addition, FINRA believes that the
proposed rule change will assist its efforts to identify problematic
terms and conditions in private placements, thereby helping to detect
and prevent fraud in connection with private placements.
---------------------------------------------------------------------------
\6\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Exchange Act. The proposed rule
change requires that members and associated persons provide relevant
disclosures to each investor prior to the sale of applicable private
placements, and file disclosure documents with FINRA no later than 15
calendar days after the date of the first sale (or, in the case of
material amendments, the date provided to an investor or prospective
investor). As noted above, FINRA does not believe that the proposed
rule change will unduly restrict capital formation through the private
placement offering process. FINRA believes that the relatively modest
``burden'' of the proposed rule change is both necessary and
appropriate in helping to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, and, in
general, to protect investors and the public interest.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
In January 2011, FINRA published Regulatory Notice 11-04 requesting
comment on proposed amendments to expand Rule 5122 (the ``11-04
Proposal''). A copy of the Notice is available on FINRA's Web site at
https://www.finra.org. The comment period expired on March 14, 2011.
FINRA received 35 comments in response to the Notice. A list of the
commenters and abbreviations that were received in response to the
Notice are attached as Exhibit A, and copies of the comment letters
received in response to the Notice are available on FINRA's Web site at
https://www.finra.org. A summary of the comments and FINRA's response is
provided below.
The 11-04 Proposal
The 11-04 Proposal would have extended virtually all of the
existing requirements of Rule 5122, i.e., those requiring disclosure,
filing and limitations on the use of offering proceeds, to all private
placements in which a member participates (subject to the listed
exemptions). While many commenters expressed support for the 11-04
Proposal,\7\ many, as discussed below, were critical of various
provisions. Most criticisms concerned proposed requirements regarding
the use of offering proceeds and filing. FINRA has considered the
comments received in response to the 11-04 Proposal. The proposed rule
change balances the goals of ensuring investors and FINRA receive key
information about private placements while maintaining the flexibility
and expediency offered by private placements. Based on these
considerations, the current proposed rule change differs in several key
respects from the 11-04 Proposal.
---------------------------------------------------------------------------
\7\ See, e.g., letters from Cornell, FSI, Intellivest
Securities, Mick & Associates, NIBA and WSI.
---------------------------------------------------------------------------
Comments Regarding Use of Offering Proceeds
The issue generating the most comment was the proposed use of
proceeds limitation (i.e., the proposed requirement that 85 percent of
the proceeds raised be used for the business purposes described in the
disclosure document). Many commenters expressed concerns about the
ability of members to monitor an issuer's use of proceeds and the
Rule's potential for additional liability if the use of proceeds
deviates from that provided in the required disclosure document.\8\
Some raised concerns that, as written, the proposed Rule would impose
burdens on or attempt to regulate non-FINRA members.\9\
---------------------------------------------------------------------------
\8\ See letters from 3PM, ABA, AOG, George, IPA, NYC Bar, NY
State Bar, NIBA, Secore & Waller, SIFMA and Sullivan & Cromwell.
\9\ See letters from ABA, NYC Bar, Patrick, Saxony, SIFMA and
Sullivan & Cromwell.
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Some commenters asserted the proposed 85 percent limitation was an
arbitrary ``one size fits all'' approach and could be a barrier to
capital formation, especially for smaller offerings or other specific
types of offerings.\10\ Commenters suggested that the fixed costs of
smaller offerings, or higher cost of specific types of offerings,
[[Page 65761]]
could make this limitation unworkable. A few commenters feared that
constraints on the allowable expenses for such offerings could force
issuers to explore alternative means of raising capital without the
assistance of member firms, including the use of finders and
unregistered persons.\11\ In addition, commenters raised interpretive
questions regarding whether certain expenses--including, among other
things, costs relating to due diligence, legal, travel, blue sky, stock
grants, warrants, tail fees, rights of first refusal, conference
expenses, trail fees, management fees and appraisals and valuations--
would be required to be treated as ``offering expenses'' or would
constitute proceeds used for business purposes.\12\
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\10\ See letters from ABA, AOG, BFS, FSI, George, IMS, IPA, NY
State Bar, Patrick, Rothwell Consulting, Saxony, Schulten Ward,
Secore & Waller, WSI and Weinstein Smith.
\11\ See letters from ABA, Krieger & Prager and REISA.
\12\ See letters from ABA, IMS, Locke Lord, Mick & Associates,
Network 1, Patrick, REISA, Saxony, Secore & Waller, SIFMA, Sullivan
& Cromwell and Weinstein Smith.
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Some commenters recommended that FINRA simply require greater
disclosures about the various uses of proceeds, offering expenses, and
compensation as an alternative to adopting a use of offering proceeds
limitation.\13\ Based in large part on these comments, as discussed
above, FINRA has amended the proposal such that it no longer includes
the substantive requirement that at least 85 percent of offering
proceeds must be used for the disclosed business purposes and has
instead chosen to reorient the Rule towards disclosure.
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\13\ See letters from FSI, IPA, NIBA, REISA and WSI.
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While FINRA continues to believe that the manner in which offering
proceeds are used is critically important in a private placement--and
that offerings in which a large percentage of offering proceeds are for
other than business purposes raise regulatory concerns--FINRA believes
that these concerns can be addressed through the obligations of broker-
dealers, under the suitability and anti-fraud provisions of the
securities laws and FINRA rules, to conduct a reasonable inquiry of an
issuer.\14\ FINRA appreciates the importance of raising capital in the
private placement market for certain issuers and recognizes commenters'
concerns that an across-the-board application of the 85 percent
requirement may impose unnecessary burdens on some offerings,
especially smaller private placements. FINRA's expectation is that the
reasonable inquiry obligations of broker-dealers will encourage
reasonable limits on the use of offering proceeds for purposes other
than generating a return on investment.\15\ If the rigorous application
of the reasonable inquiry obligations outlined in Regulatory Notice 10-
22 does not achieve this result, FINRA will reconsider the imposition
of numerical limitations. In addition, eliminating the 85 percent
requirement will simplify the administration of the Rule by removing
the need for members to determine whether various expenses would have
been classified as ``offering expenses,'' ``compensation,'' or
``business purposes'' under the Rule. In the public offering context,
FINRA's Corporate Financing Department staff's review process in
connection with issuing a ``no-objections'' opinion ensures consistent
and accurate treatment of various expenses. Since only a ``notice''
filing is required in proposed Rule 5123, the lack of staff review and
comment could raise interpretive questions regarding the application of
the 85 percent requirement if the provision remained in the Rule.
Lastly, eliminating the 85 percent requirement would eliminate any
implication, as indicated by some comments, that the 11-04 Proposal
would create an independent, continuing obligation for members to
monitor an unaffiliated issuer's use of proceeds after the closing of
an offering.
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\14\ See Regulatory Notice 10-22 (April 2010) (Regulation D
Offerings).
\15\ Members have an obligation to conduct a reasonable inquiry
regarding the use of proceeds prior to making a recommendation in
that security. See, e.g., Regulatory Notice 10-22 (regarding private
placements). Such a recommendation would not comply with the
requirements of FINRA's suitability rule if the description of the
use of proceeds in the disclosure document is inconsistent with the
information obtained in the course of this inquiry. See NASD Rule
2310 (Recommendations to Customers (Suitability)). FINRA notes that
the SEC has approved new FINRA Rule 2111 (Suitability). See
Regulatory Notice 11-02 (January 2011) (SEC Approves Consolidated
FINRA Rules Governing Know-Your-Customer and Suitability
Obligations). See also Securities Exchange Act Release No. 63325
(November 17, 2010), 75 FR 71479 (November 23, 2010) (File No. SR-
FINRA-2010-039; Order Granting Accelerated Approval, As Modified by
Amendment, to Proposed Rule Change to Adopt FINRA Rules 2090 (Know
Your Customer) and 2111 (Suitability) in the Consolidated FINRA
Rulebook); Securities Exchange Act Release No. 64260 (April 8,
2011), 76 FR 20759 (April 13, 2011) (File No. SR-FINRA-2011-016;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
to Delay the Implementation Date of FINRA Rule 2090 (Know Your
Customer) and FINRA Rule 2111 (Suitability)).
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Comments Regarding Filing Requirements
The 11-04 Proposal would have required a member to file information
with FINRA by the time an offering document is provided to any
investor. While the 11-04 Proposal states that offerings would not be
held in abeyance pending FINRA staff review and that filings would not
be ``approved'' nor would the staff issue ``no-objections'' opinions,
commenters raised concerns about potential slowdowns of offerings due
to the filing requirement. Several commenters believed that the 11-04
Proposal's filing requirement could delay the offering process as firms
would be reluctant to proceed with an offering without assurances or
clearances from FINRA.\16\ Commenters also raised technical concerns
about the proposed filing process, including concerns regarding who
must file (e.g., each selling dealer in a private placement), how
members of a selling group would know if an offering memorandum had
been previously filed, and who bears the responsibility to file
amendments.\17\ A few commenters, including the NYC Bar, suggested that
the application of the filing requirement would result in offerings
structured to avoid application of the Rule, either by limiting the
offering to exempted investors or moving the transaction offshore.
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\16\ See letters from ABA, Achates, IMS, Intellivest, IPA,
George, LeGaye, Network 1, NIBA, NYC Bar, NY State Bar, Patrick,
REISA, Saxony, Secore & Waller and Sullivan & Cromwell.
\17\ See letters from Achates, FSI and Moloney.
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In response to these comments, FINRA now proposes to require that a
member file ``no later than 15 calendar days after the date of first
sale.'' This timing requirement is the same as the filing requirement
for Form D; synchronizing these timing requirements may allow some
filers to utilize operational efficiencies. Moreover, by requiring a
``notice'' filing, FINRA will remove any implication that the FINRA
staff will provide comments on a filing; that such filing with FINRA
could be a precondition to commencing an offering; or that members
should expect to receive any FINRA staff input before proceeding with
an offering. The proposed filing requirement would nevertheless provide
FINRA staff with timely access to information about the private
placement business of FINRA members.
The proposal would require that each member that participates in a
private placement make the requisite filing. FINRA had considered
requiring only one member to file, but determined that such a
requirement would limit its ability to gain timely access to
information about the private placement business of FINRA members that
might not file. Moreover, as the comment letters indicate, requiring
only one member to file would complicate the ability of the other
members to
[[Page 65762]]
participate, since they would have to determine whether another member
had filed and whether the filing complies with FINRA's requirements. If
one member engaged in the private placement under different
compensation terms than another member, then it could further
complicate such a single-filer regime. Therefore, it is more practical,
and more helpful to FINRA's need for timely access to information about
the private placement business of members, to require every member that
participates in a particular private placement to make the notice
filing.
Other Comments
Comments regarding disclosure ranged from support \18\ to requests
for clarification or guidance regarding what would constitute adequate
disclosure \19\ to claims that disclosure would be duplicative of that
provided to the SEC pursuant to Regulation D.\20\ Some requested
clarification of specific types of disclosure (e.g., sponsor fees,\21\
non-variable third party costs \22\ or the scope of offering expenses
\23\).
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\18\ See, e.g., letter from WSI.
\19\ See, e.g., letter from LeGaye.
\20\ See letter from NY State Bar.
\21\ See letter from AOG.
\22\ See letter from Weinstein Smith.
\23\ See letters from IMS and Weinstein Smith.
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Several commenters suggested narrowing the scope of the Rule
through additional exemptions, including adding exemptions for offers
and sales to: all accredited investors; \24\ small groups of accredited
investors; \25\ or alternatively a de minimis exemption for sales to
accredited investors; \26\ other registered broker-dealers in
connection with the establishment of a joint back office arrangement;
\27\ issuers that are reporting companies under the Federal securities
laws; \28\ knowledgeable employees or officers of the issuing company;
\29\ or when there is a change in ownership.\30\ Others argued that
exemptions for the following types of securities should be added:
insurance contracts; \31\ mergers and acquisitions structured as a
stock sale either for cash or for acquirer stock; \32\ secondary sales
of securities; \33\ and privately offered commodity pools and
investment funds.\34\
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\24\ See letters from NYC Bar, SIFMA, Sullivan & Cromwell and
Weinstein Smith.
\25\ See letter from LeGaye.
\26\ See letters from ABA, IMS, NYC Bar, Rothwell Consulting,
SIFMA, St. Charles and Sullivan & Cromwell.
\27\ See letter from ABA.
\28\ See letter from SIFMA.
\29\ See letters from ABA, SIFMA and St. Charles.
\30\ See letter from IMS.
\31\ See letter from Sutherland.
\32\ See letter from NYC Bar.
\33\ See letter from Sullivan & Cromwell.
\34\ See letter from MFA.
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FINRA believes the exemptions in the proposed rule change are
appropriately tailored and inclusive, and as noted above, are very
similar to those in existing Rule 5122. Based upon its experience with
Rule 5122, FINRA does not believe it should expand the list of
exemptions. Further, FINRA notes that the proposed Rule would provide a
method by which a member may apply for an exemption from the provisions
of the Rule for good cause pursuant to the Rule 9600 Series.
Some commenters supported FINRA's proposal not to incorporate the
wholesaling exemption into the Rule,\35\ while others questioned the
elimination of this exemption, especially as the 11-04 Proposal would
have eliminated the exemption for member private offerings as well as
private placements more generally.\36\ The basis for this exemption in
Rule 5122 was that distribution of the private placement by independent
retail broker-dealers would obviate the need for the rule, which
applies to private placements in which the selling member or its
control entity is the issuer. However, given that the current proposed
rule change reaches all private placements, the reliance upon the
efforts of an ``independent'' broker-dealer is no longer relevant.
Accordingly, the wholesaling exemption is not provided in proposed Rule
5123.
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\35\ See letters from Cornell, NIBA and SIFMA.
\36\ See letters from 3PM, LeGaye, SIFMA and WSI.
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Commenters also requested that the Rule (or supplementary material)
state that the exemption provisions may be combined without triggering
the requirements of the Rule.\37\ FINRA notes that the exemption
provisions may be combined. These exemptions are derived from those in
Rule 5122. In announcing the approval of Rule 5122, FINRA stated as
follows:
\37\ See letters from ABA, NYC Bar, Rothwell Consulting and
SIFMA.
Types of exemptions may be combined without triggering the
requirements of the rule. For example, if an MPO is offered to both
qualified purchasers and employees or affiliates of the issuer or
its control entities, as long as these purchasers qualify for
exemptions under the rule, the MPO would be exempt from the rule's
requirements.\38\
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\38\ See Regulatory Notice 09-27 (May 2009) (Member Private
Offerings).
FINRA would make a similar statement in connection with a Regulatory
Notice regarding this Rule.
One commenter raised a concern that, as proposed, the Rule would
not afford confidential treatment to any comment or similar letters by
FINRA, and thus they could be discovered by a litigant through
appropriate legal action.\39\ FINRA believes that proposed paragraph
5123(d) addresses this issue and would afford confidential treatment to
all such documents.
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\39\ See letter from ABA.
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As a result of the differences between the 11-04 Proposal (and Rule
5122) and the current proposed Rule, as described above, FINRA is
proposing that the rule regarding private placements be a new rule
separate from Rule 5122.\40\
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\40\ FINRA believes that the provisions of existing Rule 5122
are appropriate for the types of private offerings covered by that
rule, i.e., the offering of securities issued by a member or its
control affiliate. In addition, FINRA is not aware of any concerns
regarding the timing of Rule 5122's filing requirement.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission shall:
(a) By order approve or disapprove such proposed rule change, or (b)
institute proceedings to determine whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Exchange Act. The Commission specifically
requests comment on the following:
Whether the proposed rule would impact issuers' access to
capital via the private placement market, particularly small issuers.
If so, how?
Whether the proposed rule would impact investors
purchasing private placement securities through a broker-dealer subject
to the new rule. If so, how? For example, would knowledge of the
information contained in a mandatory disclosure improve an investor's
ability to decide whether to invest in a private placement subject to
the rule?
Whether the proposed rule would impact registered broker-
dealers' participation in private placements. If so, how?
Comments may be submitted by any of the following methods:
[[Page 65763]]
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-FINRA-2011-057 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2011-057. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for Web site
viewing and printing in the Commission's Public Reference Room, 100 F
Street, NE., Washington, DC 20549, on official business days between
the hours of 10 a.m. and 3 p.m. Copies of such filing also will be
available for inspection and copying at the principal office of FINRA.
All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly. All submissions should refer to File Number SR-FINRA-2011-057
and should be submitted on or before November 14, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\41\
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\41\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
Exhibit A
Alphabetical List of Written Comments
1. Achates Capital Advisors LLC (March 4, 2011) (``Achates'').
2. American Bar Association (March 14, 2011) (``ABA'').
3. AOG Wealth Management (March 14, 2011) (``AOG'').
4. Balanced Financial Securities (February 12, 2011) (``BFS'').
5. Colonnade Securities LLC (March 10, 2011) (``Colonnade'').
6. Cornell University Law School (March 14, 2011) (``Cornell'').
7. Financial Services Institute (March 15, 2011) (``FSI'').
8. Ken George (March 14, 2011) (``George'').
9. Integrated Management Solutions USA LLC (March 14, 2011)
(``IMS'').
10. Investment Program Association (March 14, 2011) (``IPA'').
11. Intellivest Securities, Inc. (March 10, 2011) (``Intellivest
Securities'').
12. Krieger & Prager, LLP (February 18, 2011) (``Krieger &
Prager'').
13. The LeGaye Law Firm P.C. (March 14, 2011) (``LeGaye'').
14. Valerie Lewis (January 19, 2011) (``Lewis'').
15. Locke Lord Bissell & Liddell LLP (March 11, 2011) (``Locke
Lord'').
16. Moloney Securities Co., Inc. (March 7, 2011) (``Moloney'').
17. Managed Funds Association (March 14, 2011) (``MFA'').
18. Mick & Associates, P.C., LLO (March 10, 2011) (``Mick &
Associates'').
19. National Investment Banking Association (March 14, 2011)
(``NIBA'').
20. Network 1 Financial Securities, Inc. (March 10, 2011)
(``Network 1'').
21. New York City Bar Association (March 14, 2011) (``NYC Bar'').
22. New York State Bar Association (March 28, 2011) (``NY State
Bar'').
23. Patrick Capital Markets, LLC (March 14, 2011) (``Patrick'').
24. Real Estate Investment Securities Association (March 14, 2011)
(``REISA'').
25. Rothwell Consulting LLC (March 1, 2011) (``Rothwell
Consulting'').
26. Saxony Securities, Inc. (March 14, 2011) (``Saxony'').
27. Schulten, Ward & Turner (February 3, 2011) (``Schulten Ward'').
28. Secore & Waller, L.L.P. (March 14, 2011) (``Secore & Waller'').
29. Securities Industry and Financial Markets Association (March
14, 2011) (``SIFMA'').
30. St. Charles Capital, LLC (March 14, 2011) (``St. Charles'').
31. Sullivan & Cromwell LLP (March 14, 2011) (``Sullivan &
Cromwell'').
32. Sutherland Asbill & Brennan LLP (March 14, 2011)
(``Sutherland'').
33. Third Party Marketers Association (March 10, 2011) (``3PM'').
34. Walton Securities, Inc. (March 14, 2011) (``WSI'').
35. Weinstein Smith LLP (March 9, 2011) (``Weinstein Smith'').
[FR Doc. 2011-27328 Filed 10-21-11; 8:45 am]
BILLING CODE 8011-01-P
