FINRA amends Corporate Financing Rule and Conflict of Interest Rule

By Andrew D Ledbetter and Christopher C Paci

The Securities and Exchange Commission (SEC) recently approved amendments proposed by FINRA, the securities self-regulatory organisation whose members are broker-dealers registered with the SEC, to two of its rules that are critical in the public offering process.

FINRA Rule 5110 (the Corporate Financing Rule) generally regulates underwriting compensation and prohibits unfair arrangements in connection with the public offering of securities. Among other provisions, the rule requires members to file information with FINRA about the securities offerings in which they ‘participate’ and to disclose affiliations and other relationships that may indicate the existence of conflicts of interest. The rule also imposes lock-up restrictions on certain securities acquired from the issuer by a member participating in an offering and restricts the receipt of certain items of value, such as termination or ‘tail’ fees and rights of first refusal as to future transactions (ROFRs). In addition, FINRA Rule 5121 (the Conflict of Interest Rule) prohibits FINRA members that have a ‘conflict of interest’ from participating in a public offering of securities unless certain conditions are met.

The SEC approved amendments to these two FINRA rules that simplify member participation in offerings and associated reporting, while enabling members to negotiate more broadly for tail fees and ROFRs, as follows…

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