RIA Compliance Blog
The Securities and Exchange Commission (SEC) approved the Financial Industry Regulatory Authority’s (FINRA) Rule 5123 on June 7, 2012. The text of the final rule can be found here. The rule is creates some obligations for broker-dealers when they are engaged in selling private placements of securities. Due to a number of concerns, the SEC did not approve the rule until FINRA made a number of changes to the originally proposed rule. The final rule, which includes three amendments, was approved on an accelerated basis. The rule does not apply to all private placements. Sales to institutional accounts, qualified purchasers, investment companies, and other classes of purchasers are excluded.
The original proposal would have required broker-dealers involved in a private placement transaction to disclose to each of the investors prior to the sale the anticipated use of the proceeds from the offerings and the amount and type of offering expenses and offering compensation. If the disclosure documents did not include this information, the broker-dealer would have had to create a document for the investor containing the information. The proposal also required each broker-dealer to file the document with FINRA within fifteen days of the date of the first sale. If there were any amendments to the documents, then the amendments would also have to be filed with FINRA within fifteen days.
After the proposed rule was released for comment, the SEC received sixteen comment letters. An area of major concern was the costs and burdens relating to the proposal. FINRA responded to comments by filing amendments that eliminated the obligation of broker-dealers to create a disclosure document containing what the anticipated use of the proceeds will be, the amount and type of offering expenses and the offering compensation. If this information is in the disclosure document utilized in the private placement, it still must be filed with FINRA; however, if there was no disclosure document used then the broker-dealer does not need to create one. Rather, in a situation with no disclosure documents, the broker-dealer will have to prepare a notice filing which identifies the private placement, the participating members, and states that no disclosure document was used. The copy of the disclosure document or the statement that none was used must be filed within fifteen days after the date of the first sale. No disclosure to investors need be made by the broker-dealer.
FINRA filed another amendment clarifying that members must file not only the original offering document, but also any offering documents that have been materially amended. All documents must be filed within fifteen days after the date of first sale or when the purchaser received them.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our regulatory practice group assists financial service providers with the complex issues that arise in the course of their businesses, including compliance with federal and state laws and rules.