Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change Relating to Amendments to FINRA Rule 5110 (Corporate Financing Rule-Underwriting Terms and Arrangements) As Amended, 27355-27357 [2014-10895]
Download as PDF
Federal Register / Vol. 79, No. 92 / Tuesday, May 13, 2014 / Notices
with Euro cash. ICC states that this
change is intended to increase the Euro
cash Non-Client Liquidity Requirements
for Euro denominated products and
create more consistent liquidity
requirements across USD and Euro
denominated products. In addition to
updating its rules, ICC also proposes to
update the ICC Treasury Operations
Policies and Procedures to reflect the
proposed change in ICC’s Non-Client
Liquidity Requirements for Euro
denominated products. ICC states that
the update to the ICC Treasury
Operations Policies and Procedures will
not require any operational changes.
ICC also proposes to remove
redundant references to ‘‘US cash’’ in
Schedule 401 of the ICC Rules, as US
cash is included in all ‘‘G7 cash’’
references.
mstockstill on DSK4VPTVN1PROD with NOTICES
III. Discussion and Commission
Findings
Section 19(b)(2)(C) of the Act 4 directs
the Commission to approve a proposed
rule change of a self-regulatory
organization if the Commission finds
that such proposed rule change is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to such selfregulatory organization. Section
17A(b)(3)(F) of the Act 5 requires, among
other things, that the rules of a clearing
agency are designed to promote the
prompt and accurate clearance and
settlement of securities transactions
and, to the extent applicable, derivative
agreements, contracts, and transactions,
to assure the safeguarding of securities
and funds which are in the custody or
control of the clearing agency or for
which it is responsible and, in general,
to protect investors and the public
interest.
The Commission finds that the
proposed rule change is consistent with
the requirements of Section 17A of the
Act.6 The proposed change provides ICC
with increased available liquidity and is
therefore consistent with the
requirements of Section 17A(b)(3)(F) of
the Act 7 of promoting the prompt and
accurate clearance and settlement of
securities transactions and, to the extent
applicable, derivatives agreements,
contracts, and transactions, and helping
to protect investors and the public
interest.
IV. Conclusion
On the basis of the foregoing, the
Commission finds that the proposal is
4 15
U.S.C. 78s(b)(2)(C).
U.S.C. 78q–1(b)(3)(F).
6 15 U.S.C. 78q–1.
7 15 U.S.C. 78q–1(b)(3)(F).
5 15
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19:27 May 12, 2014
Jkt 232001
consistent with the requirements of the
Act and in particular with the
requirements of Section 17A of the Act 8
and the rules and regulations
thereunder.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,9 that the
proposed rule change (File No. SR–ICC–
2014–02) be, and hereby is, approved.10
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.11
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–10897 Filed 5–12–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72118; File No. SR–
ISEGemini–2014–09]
Self-Regulatory Organizations; ISE
Gemini, LLC; Notice of Designation of
a Longer Period for Commission
Action on Proposed Rule Change
Related to Market Maker Risk
Parameters
May 7, 2014.
On March 10, 2014, ISE Gemini, LLC
(the ‘‘Exchange’’ or ‘‘ISE Gemini’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to amend ISE Gemini Rule 804
to mitigate market maker risk by
adopting an Exchange-provided risk
management functionality. The
proposed rule change was published for
comment in the Federal Register on
March 26, 2014.3 The Commission
received no comments on the proposal.
Section 19(b)(2) of the Act 4 provides
that within 45 days of the publication of
notice of the filing of a proposed rule
change, or within such longer period up
to 90 days as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or as to which the
self-regulatory organization consents,
the Commission shall either approve the
proposed rule change, disapprove the
8 15
U.S.C. 78q–1.
U.S.C. 78s(b)(2).
10 In approving the proposed rule change, the
Commission considered the proposal’s impact on
efficiency, competition and capital formation. 15
U.S.C. 78c(f).
11 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 71758
(March 20, 2014), 79 FR 16846.
4 15 U.S.C. 78s(b)(2).
9 15
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Fmt 4703
Sfmt 4703
27355
proposed rule change, or institute
proceedings to determine whether the
proposed rule change should be
disapproved. The 45th day for this filing
is May 10, 2014. The Commission is
extending this 45-day time period.
The Commission finds it appropriate
to designate a longer period within
which to take action on the proposed
rule change, so that it has sufficient time
to consider this proposed rule change.
Accordingly, the Commission,
pursuant to Section 19(b)(2) of the Act,5
designates June 24, 2014, as the date by
which the Commission shall either
approve or disapprove, or institute
proceedings to determine whether to
disapprove, the proposed rule change
(File No. SR–ISEGemini–2014–09).
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.6
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–10899 Filed 5–12–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72114; File No. SR–FINRA–
2014–004]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Order Approving a
Proposed Rule Change Relating to
Amendments to FINRA Rule 5110
(Corporate Financing Rule—
Underwriting Terms and
Arrangements) As Amended
May 7, 2014.
On January 24, 2014, the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (‘‘Commission’’),
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a
proposed rule change to amend FINRA
Rule 5110 (Corporate Financing Rule—
Underwriting Terms and
Arrangements). On February 4, 2014,
FINRA filed Amendment No. 1 to the
proposed rule change. The proposed
rule change was published for comment
in the Federal Register on February 11,
2014.3 The Commission received one
5 Id.
6 17
CFR 200.30–3(a)(31).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 71486
(February 5, 2014), 79 FR 8226 (SR–FINRA–2014–
004) (‘‘Notice’’).
1 15
E:\FR\FM\13MYN1.SGM
13MYN1
27356
Federal Register / Vol. 79, No. 92 / Tuesday, May 13, 2014 / Notices
comment letter on the proposal.4 On
March 31, 2014, FINRA responded to
the comment letter.5 This order
approves the proposed rule change, as
amended.
I. Description of the Proposed Rule
Change 6
FINRA Rule 5110, among other
things, regulates underwriting
compensation, requires the filing of
specified information in connection
with public offerings in which members
will participate, and prohibits unfair
arrangements in connection with public
offerings of securities. FINRA proposes
to amend the Rule’s provisions
regarding unfair arrangements to: (1)
Expand the circumstances under which
members and issuers may negotiate
termination fees and rights of first
refusal (‘‘ROFR’’), with specified
conditions; (2) exempt from the filing
requirements exchange-traded funds
formed as grantor or statutory trusts;
and (3) codify the electronic filing
requirement.
Termination Fees and Rights of First
Refusal
mstockstill on DSK4VPTVN1PROD with NOTICES
Rule 5110(f) (Unreasonable Terms and
Arrangements) sets forth terms and
arrangements that, when proposed in
connection with a public offering of
securities, are considered unfair and
unreasonable. Rule 5110(f)(2)(D)
addresses fees in connection with a
public offering of securities that is not
completed according to the terms of the
agreement between the issuer and
underwriter (‘‘terminated offering’’).
Specifically, Rule 5110(f)(2)(D)
generally provides that it is unfair and
unreasonable for a member to arrange
for the payment of any compensation by
an issuer in connection with a
terminated offering (‘‘termination fee’’
or ‘‘tail fee’’). Rule 5110(f)(2)(D) further
clarifies that this prohibition does not
include compensation negotiated and
paid in connection with a separate
transaction that occurs in lieu of the
proposed offering, or reimbursement of
out-of-pocket accountable expenses
actually incurred by the member.7
4 See Letter from Stephen E. Roth and Susan S.
Krawczyk, Sutherland Asbill & Brennan LLP, on
behalf of the Committee of Annuity Insurers
(‘‘CAI’’), Washington, District of Columbia to
Elizabeth M. Murphy, Secretary, Commission, dated
March 4, 2014 (‘‘CAI Letter’’).
5 See Letter from Kathryn M. Moore, Associate
General Counsel, FINRA, to Kevin O’Neill, Deputy
Secretary, Commission (‘‘FINRA Letter’’).
6 A more detailed description of the proposal is
contained in the Notice. See supra note 4.
7 Rule 5110(f)(2)(C) prohibits payment of
commissions or reimbursement of expenses to an
underwriter prior to the commencement of the sale
of the securities being offered, except for a
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19:27 May 12, 2014
Jkt 232001
Currently, Rule 5110(f)(2)(E) provides
that, in the event an issuer terminates an
offering with an underwriter and
subsequently consummates a similar
transaction, a termination fee may be
permissible under certain
circumstances.
FINRA is proposing to amend Rule
5110(f)(2) (Prohibited Arrangements) to
generally permit termination fees where:
(1) The agreement between the
participating member and the issuer
specifies that the issuer has a right of
‘‘termination for cause’’ (i.e., where a
member fails materially to perform the
underwriting services contemplated in
the written agreement); 8 (2) the
agreement specifies that an issuer’s
exercise of its right of ‘‘termination for
cause’’ eliminates any obligations with
respect to the payment of any
termination fee; 9 (3) the amount of any
specified termination fee is reasonable
in relation to the services contemplated
in the written agreement; and (4) the
agreement specifies that the issuer is not
responsible for paying the termination
fee unless an offering or other type of
transaction is consummated by the
issuer (without involvement of the
member) within two years of the date
the issuer terminates the engagement
with the member. FINRA indicated that
the change to the rule would provide
members with additional flexibility to
negotiate termination fees.
Current Rule 5110(f)(2)(F) and (G)
addresses ROFRs, which provide a
member with the right to underwrite or
participate in future public offerings,
private placements or other financings
of the issuer. Rule 5110(f)(2)(F) deems
as unfair and unreasonable any ROFR
provided to a member that: (1) Has a
duration of more than three years from
the date of effectiveness or
commencement of sales of the public
reasonable advance against out-of-pocket
accountable expenses actually anticipated to be
incurred by the underwriter. If the expenses are not
actually incurred, any advance received must be
returned to the issuer. Paragraph (D) currently
provides that the reimbursement of out-of-pocket
accountable expenses actually incurred by the
member will not be presumed to be unfair or
unreasonable under normal circumstances. The
proposed amendment modifies paragraph (D) to
specify that out-of-pocket accountable expenses
must be bona fide.
8 The specific meaning of ‘‘termination for cause’’
would be dictated by the agreement. For purposes
of this proposal, FINRA has defined a ‘‘termination
for cause’’ to include a member’s material failure to
perform the underwriting services contemplated in
the written agreement, but events that are outside
the participating member’s control are not required
to be included in the definition.
9 Members would continue to be permitted to
receive reimbursement of out-of-pocket, bona fide,
accountable expenses actually incurred by the
participating member in connection with a
terminated offering.
PO 00000
Frm 00080
Fmt 4703
Sfmt 4703
offering, or (2) provides more than one
opportunity to waive or terminate the
ROFR in consideration of any payment
or fee.10 Rule 5110(f)(2)(G) prohibits any
payment or fee to waive or terminate a
ROFR regarding future public offerings,
private placements or other financings
that exceed specified values or that is
not paid in cash.
FINRA also proposes amendments to
permit ROFRs in both successful and
terminated offerings. ROFRs would be
permissible where: (1) The agreement
between the participating member and
issuer specifies that the issuer has a
right of termination for cause (i.e.,
where a member fails materially to
perform the underwriting services
contemplated in the written agreement);
(2) an issuer’s exercise of its right of
termination for cause eliminates any
obligations with respect to the provision
of any ROFR; and (3) any fees arising
from services provided under a ROFR
are customary for those types of
services. The Rule would continue to
provide that the duration of any ROFR
must be less than three years from the
date of commencement of sales of the
public offering (in the case of a
successful offering). In the case of a
terminated offering, the duration must
be less than three years from the date
the issuer terminates the engagement.
The agreement may not provide for
more than one opportunity to waive or
terminate the ROFR in consideration of
any payment or fee.11
Filing Requirements for Certain
Exchange-Traded Funds
Rule 5110(b)(8) (Exempt Offerings)
generally provides an exemption for
investment companies from the filing
requirements of the Rule.12 Due to this
exemption, exchange-traded funds
(‘‘ETFs’’) that are structured as
investment companies generally are
exempt. However, this exemption does
not include certain other ETFs that are
not investment companies. FINRA
10 Historically, FINRA has interpreted the Rule to
permit ROFRs only in the case of successful
offerings.
11 FINRA is proposing to redesignate Rule
5110(f)(2)(G) as Rule 5110(f)(2)(F), which prohibits
any payment or fee to waive or terminate a ROFR
regarding future public offerings, private
placements or other financings that exceed
specified values or that is not paid in cash.
12 Rule 5110(b)(8)(C) exempts from the Rule’s
filing requirements securities of ‘‘open-end’’
investment companies as defined in Section 5(a)(1)
of the Investment Company Act of 1940
(‘‘Investment Company Act’’) and securities of any
‘‘closed-end’’ investment company as defined in
Section 5(a)(2) of the Investment Company Act that:
(1) Make periodic repurchase offers pursuant to
Rule 23c–3(b) under of the Investment Company
Act; and (2) offer their shares on a continuous basis
pursuant to Rule 415(a)(1)(xi) of SEC Regulation C.
E:\FR\FM\13MYN1.SGM
13MYN1
Federal Register / Vol. 79, No. 92 / Tuesday, May 13, 2014 / Notices
proposes to add an exemption for these
ETFs that are not included in the
definition of an ‘‘investment company’’
because the creation structure of ETFs is
not a distribution model that Rule 5110
was designed to address. Specifically,
FINRA is proposing to exempt offerings
of securities issued by a pooled
investment vehicle, whether formed as
a trust, partnership, corporation, limited
liability company or other collective
investment vehicle, that is not registered
as an investment company under the
Investment Company Act and has a
class of equity securities listed for
trading on a national securities
exchange, provided that such equity
securities may be created or redeemed
on any business day at their net asset
value per share.
Electronic Filing
Rule 5110(b) (Filing Requirements)
generally provides that no member or
person associated with a member shall
participate in any manner in a public
offering of securities subject to Rules
2310, 5110 or 5121 unless the specified
documents and information relating to
the offering have been filed with and
reviewed by FINRA. FINRA proposes to
amend the Rule to make clarifying, nonsubstantive changes regarding
documents filed through FINRA’s
electronic filing system.13
mstockstill on DSK4VPTVN1PROD with NOTICES
II. Discussion of Comments and
FINRA’s Response
In response to the Commission’s
request for comment on the proposed
rule change,14 the Commission received
one comment letter from the CAI.15 CAI
stated that it has no objection to
FINRA’s proposed rule change, but CAI
stated its belief that, consistent with the
proposal to treat different types of ETFs
the same, FINRA should also exempt
different types of insurance contracts
from the filing requirements of the
Corporate Financing Rule.16 The
commenter points out that in its current
form, Rule 5110(b)(8) provides
exemptions for only three types of
insurance contracts,17 but not for other
offerings of insurance contracts.18
13 The effective date of the electronic filing
requirements under Rule 5110 was July 12, 2002.
See Notice supra note 4.
14 See Notice supra note 4.
15 See supra note 5.
16 See supra note 5, at 2.
17 See supra note 5, at 2–3. Specifically, these
contracts are: exempted securities, as defined in
Section 3(a)(12) of the Act; variable contracts, as
defined in FINRA Rule 2320(b); and modified
guaranteed annuity contracts and modified
guaranteed life insurance policies. See id.
18 Such insurance contracts could include
annuity and life insurance contracts using an
indexed method for crediting interest, synthetic
VerDate Mar<15>2010
19:27 May 12, 2014
Jkt 232001
Consequently, CAI proposes that
‘‘FINRA also consider an additional
‘catch-all’ exemption for offerings of
insurance contracts not explicitly
described in existing exemptions from
the Corporate Financing Rule in order to
clarify and confirm that offerings of
insurance contracts are not subject to
the filing requirements of the Corporate
Financing Rule.’’ 19 CAI states that these
presently non-exempt contracts share a
number of features with the contract
types that are exempt from the
Corporate Financing Rule.20 CAI
therefore proposes that FINRA amend
Rule 5110(b)(8) to exempt offerings of
insurance premium funding programs
and any other types of insurance
contracts issued by an insurance
company (not otherwise covered in an
exemption above), except contracts
which are exempt securities pursuant to
Section 3(a)(8) of the Securities Act of
1933.21
In its response, FINRA stated that it
appreciates CAI’s comments, but
considers the comments to be outside
the scope of the proposal.22 FINRA
stated that it will separately consider
the comments and determine whether
any future action is appropriate.23
III. Discussion and Commission
Findings
The Commission has carefully
reviewed the proposed rule change, the
comment letter, and FINRA’s response
to the comment letter, and believes that
FINRA has adequately addressed the
comment letter. The Commission finds
that the proposed rule change is
consistent with the Act and the rules
and regulations thereunder applicable to
a national securities association.24 In
particular, the Commission finds that
the proposed rule change is consistent
with Section 15A(b)(6) of the Act,25
which, among other things, requires that
FINRA rules be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in facilitating transactions in securities,
to remove impediments to and perfect
the mechanism of a free and open
guaranteed withdrawal benefit products (also
known as contingent annuities), and combination
long-term care insurance with cash value annuities
and life insurance products. See supra note 5, at 3.
19 See supra note 5, at 1–2.
20 See supra note 5, at 4.
21 See id.
22 See supra note 6, at 2.
23 See id.
24 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
25 15 U.S.C. 78o–3(b)(6).
PO 00000
Frm 00081
Fmt 4703
Sfmt 9990
27357
market and a national market system,
and, in general, to protect investors and
the public interest.
As discussed above, FINRA proposes
to amend Rule 5110(f) to expand the
circumstances under which members
and issuers may negotiate termination
fees and ROFR. The Commission
believes that the proposed rule change
is reasonable because it may provide
more flexibility to issuers and
participating members in negotiating
termination fees and terms and
arrangements for ROFR, while also
promoting the protection of issuers
where a member fails materially to
perform the underwriting services
contemplated in the written agreement.
Additionally, as discussed above,
FINRA proposes to amend Rule 5110(b)
to extend the exemption from the filing
requirements of Rule 5110(b)(8) that is
generally afforded to ETFs structured as
investment companies to ETFs formed
as grantor or statutory trusts. The
Commission believes that extending this
exemption to these ETFs is reasonable
because it will ensure that similarly
situated ETFs are treated the same
under Rule 5110.
Lastly, FINRA proposes amendments
to Rule 5110 to codify the electronic
filing requirement. The Commission
believes that this amendment is
reasonable because it will provide
clarification regarding the manner by
which documents are filed with FINRA.
For the reasons stated above, the
Commission finds that the rule change
is consistent with the Act and the rules
and regulations thereunder.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,26 that the
proposed rule change (SR–FINRA–
2014–004) be, and it hereby is,
approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.27
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–10895 Filed 5–12–14; 8:45 am]
BILLING CODE 8011–01–P
26 15
27 17
E:\FR\FM\13MYN1.SGM
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
13MYN1
Agencies
[Federal Register Volume 79, Number 92 (Tuesday, May 13, 2014)]
[Notices]
[Pages 27355-27357]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-10895]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72114; File No. SR-FINRA-2014-004]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving a Proposed Rule Change Relating to
Amendments to FINRA Rule 5110 (Corporate Financing Rule--Underwriting
Terms and Arrangements) As Amended
May 7, 2014.
On January 24, 2014, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend FINRA Rule 5110 (Corporate Financing
Rule--Underwriting Terms and Arrangements). On February 4, 2014, FINRA
filed Amendment No. 1 to the proposed rule change. The proposed rule
change was published for comment in the Federal Register on February
11, 2014.\3\ The Commission received one
[[Page 27356]]
comment letter on the proposal.\4\ On March 31, 2014, FINRA responded
to the comment letter.\5\ This order approves the proposed rule change,
as amended.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 71486 (February 5,
2014), 79 FR 8226 (SR-FINRA-2014-004) (``Notice'').
\4\ See Letter from Stephen E. Roth and Susan S. Krawczyk,
Sutherland Asbill & Brennan LLP, on behalf of the Committee of
Annuity Insurers (``CAI''), Washington, District of Columbia to
Elizabeth M. Murphy, Secretary, Commission, dated March 4, 2014
(``CAI Letter'').
\5\ See Letter from Kathryn M. Moore, Associate General Counsel,
FINRA, to Kevin O'Neill, Deputy Secretary, Commission (``FINRA
Letter'').
---------------------------------------------------------------------------
I. Description of the Proposed Rule Change \6\
---------------------------------------------------------------------------
\6\ A more detailed description of the proposal is contained in
the Notice. See supra note 4.
---------------------------------------------------------------------------
FINRA Rule 5110, among other things, regulates underwriting
compensation, requires the filing of specified information in
connection with public offerings in which members will participate, and
prohibits unfair arrangements in connection with public offerings of
securities. FINRA proposes to amend the Rule's provisions regarding
unfair arrangements to: (1) Expand the circumstances under which
members and issuers may negotiate termination fees and rights of first
refusal (``ROFR''), with specified conditions; (2) exempt from the
filing requirements exchange-traded funds formed as grantor or
statutory trusts; and (3) codify the electronic filing requirement.
Termination Fees and Rights of First Refusal
Rule 5110(f) (Unreasonable Terms and Arrangements) sets forth terms
and arrangements that, when proposed in connection with a public
offering of securities, are considered unfair and unreasonable. Rule
5110(f)(2)(D) addresses fees in connection with a public offering of
securities that is not completed according to the terms of the
agreement between the issuer and underwriter (``terminated offering'').
Specifically, Rule 5110(f)(2)(D) generally provides that it is unfair
and unreasonable for a member to arrange for the payment of any
compensation by an issuer in connection with a terminated offering
(``termination fee'' or ``tail fee''). Rule 5110(f)(2)(D) further
clarifies that this prohibition does not include compensation
negotiated and paid in connection with a separate transaction that
occurs in lieu of the proposed offering, or reimbursement of out-of-
pocket accountable expenses actually incurred by the member.\7\
Currently, Rule 5110(f)(2)(E) provides that, in the event an issuer
terminates an offering with an underwriter and subsequently consummates
a similar transaction, a termination fee may be permissible under
certain circumstances.
---------------------------------------------------------------------------
\7\ Rule 5110(f)(2)(C) prohibits payment of commissions or
reimbursement of expenses to an underwriter prior to the
commencement of the sale of the securities being offered, except for
a reasonable advance against out-of-pocket accountable expenses
actually anticipated to be incurred by the underwriter. If the
expenses are not actually incurred, any advance received must be
returned to the issuer. Paragraph (D) currently provides that the
reimbursement of out-of-pocket accountable expenses actually
incurred by the member will not be presumed to be unfair or
unreasonable under normal circumstances. The proposed amendment
modifies paragraph (D) to specify that out-of-pocket accountable
expenses must be bona fide.
---------------------------------------------------------------------------
FINRA is proposing to amend Rule 5110(f)(2) (Prohibited
Arrangements) to generally permit termination fees where: (1) The
agreement between the participating member and the issuer specifies
that the issuer has a right of ``termination for cause'' (i.e., where a
member fails materially to perform the underwriting services
contemplated in the written agreement); \8\ (2) the agreement specifies
that an issuer's exercise of its right of ``termination for cause''
eliminates any obligations with respect to the payment of any
termination fee; \9\ (3) the amount of any specified termination fee is
reasonable in relation to the services contemplated in the written
agreement; and (4) the agreement specifies that the issuer is not
responsible for paying the termination fee unless an offering or other
type of transaction is consummated by the issuer (without involvement
of the member) within two years of the date the issuer terminates the
engagement with the member. FINRA indicated that the change to the rule
would provide members with additional flexibility to negotiate
termination fees.
---------------------------------------------------------------------------
\8\ The specific meaning of ``termination for cause'' would be
dictated by the agreement. For purposes of this proposal, FINRA has
defined a ``termination for cause'' to include a member's material
failure to perform the underwriting services contemplated in the
written agreement, but events that are outside the participating
member's control are not required to be included in the definition.
\9\ Members would continue to be permitted to receive
reimbursement of out-of-pocket, bona fide, accountable expenses
actually incurred by the participating member in connection with a
terminated offering.
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Current Rule 5110(f)(2)(F) and (G) addresses ROFRs, which provide a
member with the right to underwrite or participate in future public
offerings, private placements or other financings of the issuer. Rule
5110(f)(2)(F) deems as unfair and unreasonable any ROFR provided to a
member that: (1) Has a duration of more than three years from the date
of effectiveness or commencement of sales of the public offering, or
(2) provides more than one opportunity to waive or terminate the ROFR
in consideration of any payment or fee.\10\ Rule 5110(f)(2)(G)
prohibits any payment or fee to waive or terminate a ROFR regarding
future public offerings, private placements or other financings that
exceed specified values or that is not paid in cash.
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\10\ Historically, FINRA has interpreted the Rule to permit
ROFRs only in the case of successful offerings.
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FINRA also proposes amendments to permit ROFRs in both successful
and terminated offerings. ROFRs would be permissible where: (1) The
agreement between the participating member and issuer specifies that
the issuer has a right of termination for cause (i.e., where a member
fails materially to perform the underwriting services contemplated in
the written agreement); (2) an issuer's exercise of its right of
termination for cause eliminates any obligations with respect to the
provision of any ROFR; and (3) any fees arising from services provided
under a ROFR are customary for those types of services. The Rule would
continue to provide that the duration of any ROFR must be less than
three years from the date of commencement of sales of the public
offering (in the case of a successful offering). In the case of a
terminated offering, the duration must be less than three years from
the date the issuer terminates the engagement. The agreement may not
provide for more than one opportunity to waive or terminate the ROFR in
consideration of any payment or fee.\11\
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\11\ FINRA is proposing to redesignate Rule 5110(f)(2)(G) as
Rule 5110(f)(2)(F), which prohibits any payment or fee to waive or
terminate a ROFR regarding future public offerings, private
placements or other financings that exceed specified values or that
is not paid in cash.
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Filing Requirements for Certain Exchange-Traded Funds
Rule 5110(b)(8) (Exempt Offerings) generally provides an exemption
for investment companies from the filing requirements of the Rule.\12\
Due to this exemption, exchange-traded funds (``ETFs'') that are
structured as investment companies generally are exempt. However, this
exemption does not include certain other ETFs that are not investment
companies. FINRA
[[Page 27357]]
proposes to add an exemption for these ETFs that are not included in
the definition of an ``investment company'' because the creation
structure of ETFs is not a distribution model that Rule 5110 was
designed to address. Specifically, FINRA is proposing to exempt
offerings of securities issued by a pooled investment vehicle, whether
formed as a trust, partnership, corporation, limited liability company
or other collective investment vehicle, that is not registered as an
investment company under the Investment Company Act and has a class of
equity securities listed for trading on a national securities exchange,
provided that such equity securities may be created or redeemed on any
business day at their net asset value per share.
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\12\ Rule 5110(b)(8)(C) exempts from the Rule's filing
requirements securities of ``open-end'' investment companies as
defined in Section 5(a)(1) of the Investment Company Act of 1940
(``Investment Company Act'') and securities of any ``closed-end''
investment company as defined in Section 5(a)(2) of the Investment
Company Act that: (1) Make periodic repurchase offers pursuant to
Rule 23c-3(b) under of the Investment Company Act; and (2) offer
their shares on a continuous basis pursuant to Rule 415(a)(1)(xi) of
SEC Regulation C.
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Electronic Filing
Rule 5110(b) (Filing Requirements) generally provides that no
member or person associated with a member shall participate in any
manner in a public offering of securities subject to Rules 2310, 5110
or 5121 unless the specified documents and information relating to the
offering have been filed with and reviewed by FINRA. FINRA proposes to
amend the Rule to make clarifying, non-substantive changes regarding
documents filed through FINRA's electronic filing system.\13\
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\13\ The effective date of the electronic filing requirements
under Rule 5110 was July 12, 2002. See Notice supra note 4.
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II. Discussion of Comments and FINRA's Response
In response to the Commission's request for comment on the proposed
rule change,\14\ the Commission received one comment letter from the
CAI.\15\ CAI stated that it has no objection to FINRA's proposed rule
change, but CAI stated its belief that, consistent with the proposal to
treat different types of ETFs the same, FINRA should also exempt
different types of insurance contracts from the filing requirements of
the Corporate Financing Rule.\16\ The commenter points out that in its
current form, Rule 5110(b)(8) provides exemptions for only three types
of insurance contracts,\17\ but not for other offerings of insurance
contracts.\18\ Consequently, CAI proposes that ``FINRA also consider an
additional `catch-all' exemption for offerings of insurance contracts
not explicitly described in existing exemptions from the Corporate
Financing Rule in order to clarify and confirm that offerings of
insurance contracts are not subject to the filing requirements of the
Corporate Financing Rule.'' \19\ CAI states that these presently non-
exempt contracts share a number of features with the contract types
that are exempt from the Corporate Financing Rule.\20\ CAI therefore
proposes that FINRA amend Rule 5110(b)(8) to exempt offerings of
insurance premium funding programs and any other types of insurance
contracts issued by an insurance company (not otherwise covered in an
exemption above), except contracts which are exempt securities pursuant
to Section 3(a)(8) of the Securities Act of 1933.\21\
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\14\ See Notice supra note 4.
\15\ See supra note 5.
\16\ See supra note 5, at 2.
\17\ See supra note 5, at 2-3. Specifically, these contracts
are: exempted securities, as defined in Section 3(a)(12) of the Act;
variable contracts, as defined in FINRA Rule 2320(b); and modified
guaranteed annuity contracts and modified guaranteed life insurance
policies. See id.
\18\ Such insurance contracts could include annuity and life
insurance contracts using an indexed method for crediting interest,
synthetic guaranteed withdrawal benefit products (also known as
contingent annuities), and combination long-term care insurance with
cash value annuities and life insurance products. See supra note 5,
at 3.
\19\ See supra note 5, at 1-2.
\20\ See supra note 5, at 4.
\21\ See id.
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In its response, FINRA stated that it appreciates CAI's comments,
but considers the comments to be outside the scope of the proposal.\22\
FINRA stated that it will separately consider the comments and
determine whether any future action is appropriate.\23\
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\22\ See supra note 6, at 2.
\23\ See id.
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III. Discussion and Commission Findings
The Commission has carefully reviewed the proposed rule change, the
comment letter, and FINRA's response to the comment letter, and
believes that FINRA has adequately addressed the comment letter. The
Commission finds that the proposed rule change is consistent with the
Act and the rules and regulations thereunder applicable to a national
securities association.\24\ In particular, the Commission finds that
the proposed rule change is consistent with Section 15A(b)(6) of the
Act,\25\ which, among other things, requires that FINRA rules be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest.
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\24\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\25\ 15 U.S.C. 78o-3(b)(6).
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As discussed above, FINRA proposes to amend Rule 5110(f) to expand
the circumstances under which members and issuers may negotiate
termination fees and ROFR. The Commission believes that the proposed
rule change is reasonable because it may provide more flexibility to
issuers and participating members in negotiating termination fees and
terms and arrangements for ROFR, while also promoting the protection of
issuers where a member fails materially to perform the underwriting
services contemplated in the written agreement.
Additionally, as discussed above, FINRA proposes to amend Rule
5110(b) to extend the exemption from the filing requirements of Rule
5110(b)(8) that is generally afforded to ETFs structured as investment
companies to ETFs formed as grantor or statutory trusts. The Commission
believes that extending this exemption to these ETFs is reasonable
because it will ensure that similarly situated ETFs are treated the
same under Rule 5110.
Lastly, FINRA proposes amendments to Rule 5110 to codify the
electronic filing requirement. The Commission believes that this
amendment is reasonable because it will provide clarification regarding
the manner by which documents are filed with FINRA.
For the reasons stated above, the Commission finds that the rule
change is consistent with the Act and the rules and regulations
thereunder.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\26\ that the proposed rule change (SR-FINRA-2014-004) be, and it
hereby is, approved.
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\26\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-10895 Filed 5-12-14; 8:45 am]
BILLING CODE 8011-01-P