Notice Of Filing Of Partial Amendment No. 2 And Order .
SECURITIES AND EXCHANGE COMMISSION(Release No. 34-87855; File No. SR-FINRA-2019-012)December 23, 2019Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing ofPartial Amendment No. 2 and Order Granting Accelerated Approval of the Proposed RuleChange to Amend FINRA Rule 5110 (Corporate Financing Rule – Underwriting Terms andArrangements) to Make Substantive, Organizational, and Terminology Changes, as Modified byPartial Amendment No. 1 and Partial Amendment No. 2I.IntroductionOn April 11, 2019, Financial Industry Regulatory Authority, Inc. (“FINRA”) filed withthe Securities and Exchange Commission (the “Commission” or “SEC”), pursuant to Section19(b)(1) of the Securities Exchange Act of 1934 (“Exchange Act”)1 and Rule 19b-4 thereunder,2a proposed rule change to amend FINRA Rule 5110 (Corporate Financing Rule – UnderwritingTerms and Arrangements) (“Rule” or “Rule 5110”) to make substantive, organizational, andterminology changes to the Rule.The proposed rule change was published for comment in the Federal Register on May 1,2019.3 On June 12, 2019, the Commission extended to July 30, 2019, the time period in whichto approve the proposed rule change, disapprove the proposed rule change, or instituteproceedings to determine whether to approve or disapprove the proposed rule change.4 TheCommission received six comment letters on the proposal.5 On July 11, 2019, FINRA115 U.S.C. 78s(b)(1).217 CFR 240.19b-4.3See Securities Exchange Act Release No. 85715 (April 25, 2019), 84 FR 18592 (May 1,2019) (“Notice”).4See Securities Exchange Act Release No. 86091 (June 12, 2019), 84 FR 28371 (June 18,2019).5See letter from Suzanne Rothwell, Managing Member, Rothwell Consulting LLC, toSecretary, Commission, dated May 14, 2019 (“Rothwell”); letter from Stuart J. Kaswell,
responded to the comments and filed Partial Amendment No. 1 to the proposal.6 On July 29,2019, the Commission published Partial Amendment No. 1 for notice and comment andinstituted proceedings pursuant to Section 19(b)(2)(B) of the Exchange Act7 to determinewhether to approve or disapprove the proposed rule change, as modified by Partial AmendmentNo. 1.8 The Commission received three comment letters in response to the Order InstitutingProceedings.9 On October 28, 2019, the Commission extended the time period in which theCommission must approve or disapprove the proposed rule change, as amended by PartialAmendment No. 1.10 On November 8, 2019, FINRA responded to the comments and filedEsq., to Vanessa Countryman, Acting Director, Commission, dated May 17, 2019(“Kaswell Letter No. 1”); letter from Eversheds Sutherland (US) LLP, on behalf of theCommittee of Annuity Insurers, to Brent J. Fields, Secretary, Commission, dated May 21,2019 (“CAI”); letter from Aseel Rabie, Managing Director and Associate GeneralCounsel, Securities Industry and Financial Markets Association, to Vanessa Countryman,Acting Secretary, Commission, dated May 30, 2019 (“SIFMA Letter No. 1”); letter fromRobert E. Buckholz, Chair, Federal Regulation of Securities Committee, ABA BusinessLaw Section, American Bar Association, to Vanessa Countryman, Acting Secretary,Commission, dated May 30, 2019 (“ABA”); letter from Davis Polk & Wardwell LLP, toVanessa Countryman, Acting Secretary, Commission, dated June 5, 2019 (“Davis Polk”).6See letter from Jeanette Wingler, Associate General Counsel, FINRA, to VanessaCountryman, Secretary, Commission, dated July 11, 2019 (“FINRA Response No. 1”).Partial Amendment No. 1 is available at a-2019-012. See also Order Instituting Proceedings, infra note 8.715 U.S.C. 78s(b)(2)(B).8See Securities Exchange Act Release No. 8650977391 (July 29, 2019), 84 FR 37921(August 2, 2019) (“Order Instituting Proceedings”).9See letter from Hardy Callcott and Joseph McLaughlin, to Vanessa Countryman,Secretary, Commission, dated August 14, 2019 (“Callcott”); letter from Stuart J. Kaswell,Law Office of Stuart J. Kaswell, LLC, to Jill M. Peterson, Assistant Secretary,Commission, dated August 16, 2019 (“Kaswell Letter No. 2”); and letter from AseelRabie, Managing Director and Associate General Counsel, Securities Industry andFinancial Markets Association, to Vanessa Countryman, Secretary, Commission, datedAugust 23, 2019 (“SIFMA Letter No. 2”).10See Securities Exchange Act Release No. 87407 (October 28, 2019), 84 FR 58794(November 1, 2019).2
Partial Amendment No. 2 to the proposal.11 This order provides notice of filing of PartialAmendment No. 2 and approves the proposal, as modified by Partial Amendments No. 1 and No.2, on an accelerated basis.II.Description of the Proposed Rule ChangeBelow is a description of FINRA’s proposal as modified by Partial Amendment No. 1,followed by a description of Partial Amendment No. 2.A.Proposed Rule Change as Modified by Partial Amendment No. 112FINRA proposes to modify Rule 5110 in an effort to modernize, simplify, and streamlinethe Rule. Specifically, FINRA proposes changes to the following: (1) filing requirements; (2)filing requirements for shelf offerings; (3) exemptions from filing and substantive requirements;(4) underwriting compensation; (5) venture capital exceptions; (6) treatment of non-convertibleor non-exchangeable debt securities and derivatives; (7) lock-up restrictions; (8) prohibited termsand arrangements; and (9) defined terms. FINRA states that these changes should lessen theregulatory costs and burdens incurred when complying with the Rule.11See letter from Jeanette Wingler, Associate General Counsel, FINRA, to VanessaCountryman, Secretary, Commission, dated November 8, 2019 (“FINRA Response No.2”). Partial Amendment No. 2 is available at a-2019-012. See also Section II.B infra.12For a more detailed description of the proposed rule change as modified by PartialAmendment No. 1, see Notice, supra note 3, and Order Instituting Proceedings, supranote 8. See also Partial Amendment No. 1 available 7/sr-finra-2019-012-amendment-no1.pdf.3
Filing RequirementsFINRA proposes to allow members more time to make the required filings with FINRAfrom one business day after filing with the SEC or a state securities commission or similar stateregulatory authority to three business days.13FINRA also proposes to clarify and reduce filing requirements by directing members toprovide SEC document identification number if available.14 FINRA proposes to require filing:(1) industry-standard master forms of agreement only if specifically requested to do so byFINRA;15 (2) amendments to previously filed documents only if there have been changesrelating to the disclosures that impact the underwriting terms and arrangements for the publicoffering in those documents;16 (3) a representation as to whether any associated person oraffiliate of a participating member is a beneficial owner of 5% or more of “equity and equitylinked securities”;17 and (4) an estimate of the maximum value for each item of underwritingcompensation.18Proposed Rule 5110(a)(4)(B)(iv) would not require filing a description of any securitiesacquired in accordance with Supplementary Material .01(b), which sets forth a non-exhaustivelist of payments that generally would not be deemed to be underwriting compensation.1913See proposed Rule 5110(a)(3)(A).14See proposed Rule 5110(a)(4)(A).15See proposed Rule 5110(a)(4)(A)(ii).16See proposed Rule 5110(a)(4)(A)(iii).17See proposed Rule 5110(a)(4)(B)(iii) and proposed Rule 5110(j)(7).18See proposed Rule 5110(a)(4)(B)(ii).19See Order Instituting Proceedings, supra note 8, 84 FR at 37927-28, and PartialAmendment No. 1, supra note 6.4
FINRA also proposes to make a number of other clarifications regarding filingrequirements to FINRA.20 For example, the proposed rule change would clarify that a memberparticipating in an offering is not required to file with FINRA if the filing has been made byanother member participating in the offering.21 In addition, rather than providing a nonexhaustive list of types of public offerings that are required to be filed, the proposed rule changewould instead state that a public offering in which a member participates must be filed for reviewunless exempted by the Rule.22 The proposed rule change, moreover, would clarify the generalstandard that no member may engage in the distribution or sale of securities unless FINRA hasprovided an opinion that it has no objection to the proposed underwriting terms andarrangements.23 The proposed rule change also would clarify that any member acting as amanaging underwriter or in a similar capacity must notify the other members participating in thepublic offering if informed of an opinion by FINRA that the underwriting terms andarrangements are unfair and unreasonable and the proposed terms and arrangements have notbeen appropriately modified.24Further, FINRA proposes to adopt a new provision addressing terminated offerings,which provides that, when an offering is not completed according to the terms of an agreement20See proposed Rule 5110(a)(3)(B), 5110(a)(2), 5110(a)(1)(C), and 5110(a)(1)(B). Seealso Notice, supra note 3, 84 FR at 18593.21See proposed Rule 5110(a)(3)(B). Participating members are responsible for filing publicofferings with FINRA. While an issuer may file an offering with FINRA if aparticipating member has not yet been engaged, a participating member must assumefiling responsibilities once it has been engaged.22See proposed Rule 5110(a)(2).23See proposed Rule 5110(a)(1)(C).24See proposed Rule 5110(a)(1)(B).5
entered into by the issuer and a member, but the member has received underwritingcompensation, the member must give written notification to FINRA of all underwritingcompensation received or to be received, including a copy of any agreement governing thearrangement.25Filing Requirements for Shelf OfferingsFINRA proposes to codify exemptions from the filing requirements for certain shelfofferings that have historically been exempt from Rule 5110 and to streamline the filingrequirements for the remaining shelf offerings.26Public Offerings Exempt from Substantive and/or Filing RequirementFINRA proposes to expand and clarify the scope of the exemptions under current Rule5110. For example, FINRA proposes to exempt from Rule 5110’s filing requirement a publicoffering by an “experienced issuer.”27 And although the proposed rule change would continue toapply Rule 5110’s filing requirement to shelf offerings by issuers that do not meet the“experienced issuer” standard, such issuer would only need to file the following: (1) theSecurities Act of 1933 (“Securities Act”) registration statement number; and (2) if specificallyrequested by FINRA, other documents and information set forth in Rule 5110(a)(4)(A) and (B).2825See proposed Rule 5110(a)(4)(C) and proposed Rule 5110(g)(5).26See Notice, supra note 3, 84 FR at 18593-594.27The proposed rule change would delete references to the pre-1992 standards for Form S-3and standards approved in 1991 for Form F-10 and instead codify the requirement thatthe issuer have a 36-month reporting history and at least 150 million aggregate marketvalue of voting stock held by non-affiliates or alternatively the aggregate market value ofvoting stock held by non-affiliates is at least 100 million and the issuer has an annualtrading volume of three million shares or more in the stock. See proposed Rule5110(j)(6), 5110(h)(1)(C), and Notice, supra note 3, 84 FR at 18593-594.28See proposed Rule 5110(a)(4)(E).6
Moreover, in proposed Rule 5110(h)(1)(A), FINRA proposes to clarify that securities ofbanks that have qualifying outstanding debt securities are exempt from the filing requirement. 29Further, in the same provision, FINRA proposes to clarify that Treasury securities would notqualify for an exemption. Accordingly, FINRA proposes to make clear that the exemptionapplies to “securities offered by a bank, corporate issuer, foreign government or foreigngovernment agency that has outstanding unsecured non-convertible debt with a term of issue ofat least four years or unsecured non-convertible preferred securities that are investment graderated, as defined in Rule 5121(f)(8), or are outstanding securities in the same series that haveequal rights and obligations as investment grade rated securities, provided that an initial publicoffering of equity is required to be filed” (emphasis added).30FINRA also proposes to expand the current list of offerings that are exempt from both thefiling requirements and substantive provisions of Rule 5110. Specifically, FINRA proposes toinclude from such exemptions public offerings of closed-end “tender offer” funds (i.e., closedend funds that repurchase shares from shareholders pursuant to tender offers), insurancecontracts, and unit investment trusts.31 In addition, FINRA would also include in suchexemptions tender offers by issuers for their own securities made pursuant to Rule 13e-4 underthe Exchange Act.32In addition, FINRA proposes to reclassify three items from the offerings exempt fromfiling and rule compliance to offerings excluded from the definition of public offering. These29See proposed Rule 5110(h)(1)(A).30See Order Instituting Proceedings, supra note 8, 84 FR at 37926.31See proposed Rule 5110(h)(2)(E), (K) and (L).32See Order Instituting Proceedings, supra note 8, 84 FR at 37926, and Partial AmendmentNo. 1, supra note 6.7
include: (1) offerings exempt from registration with the SEC pursuant to Section 4(a)(1), (2) and(6) of the Securities Act; (2) offerings exempt from registration under specified Regulation Dprovisions; and (3) offerings of exempted securities as defined in Section 3(a)(12) of theExchange Act.33Disclosure RequirementsFINRA states that the proposed rule change would retain the current requirements foritemized disclosure of underwriting compensation and for disclosing dollar amounts ascribed toeach such item.34 Further, the proposal makes explicit the existing practice of disclosingspecified material terms and arrangements related to underwriting compensation in theprospectus, and requires a description for: (1) any right of first refusal (“ROFR”) granted to aparticipating member and its duration; and (2) the material terms and arrangements of securitiesacquired by the participating member (e.g., exercise terms, demand rights, piggyback registrationrights, and lock-up periods).35Underwriting CompensationFINRA proposes to define the term “underwriting compensation” in proposed Rule 5110to mean “any payment, right, interest, or benefit received or to be received by a participatingmember from any source for underwriting, allocation, distribution, advisory and other investmentbanking services in connection with a public offering. In addition, underwriting compensationshall include finder’s fees, underwriter’s counsel fees and securities.”3633See proposed Rule 5110(j)(18) and Order Instituting Proceedings, supra note 8, 84 FR at37922.34See proposed Rule 5110(b)(1) and Supplementary Material .05 to Rule 5110. See alsoproposed Rule 5110(e)(1)(B) requiring disclosure of lock-ups.35See proposed Supplementary Material .05 to Rule 5110.36See proposed Rule 5110(j)(22).8
Further, FINRA provides that payments and benefits received during the applicablereview period would be considered in evaluating underwriting compensation. According toFINRA, Rule 5110 currently provides that all items of value received or to be received from anysource are presumed to be underwriting compensation when received during the periodcommencing 180 days before the required filing date of the registration statement or similardocument, and up to 90 days following the effectiveness or commencement of sales of a publicoffering.FINRA states that, to better reflect the different types of offerings subject to the Rule, theproposed rule change would introduce the defined term “review period,” and that the applicabletime period would vary based on the type of offering. Accordingly, the proposed rule changewould define the term “review period” to mean: (1) for a firm commitment offering, the 180-dayperiod preceding the required filing date through the 60-day period following the effective dateof the offering; (2) for a best efforts offering, the 180-day period preceding the required filingdate through the 60-day period following the final closing of the offering; and (3) for a firmcommitment or best efforts takedown or any other continuous offering made pursuant to Rule415 of the Securities Act, the 180-day period preceding the required filing date of the takedownor continuous offering through the 60-day period following the final closing of the takedown orcontinuous offering.37The proposed rule change would continue to provide two non-exhaustive lists ofexamples of payments or benefits that would and would not be considered underwriting37See proposed Rule 5110(j)(20). FINRA states that, in accordance with this proposal,payments and benefits received during the applicable review period would be consideredin evaluating underwriting compensation.9
compensation, with streamlining and clarifying modification.38 According to FINRA, theproposed examples of payments or benefits that would be underwriting compensation arecomparable to the list of items of value in the current Rule with some additional clarifyingchanges. For example, the proposed rule change would expand the current item of value relatedto reimbursement of expenses to provide that fees and expenses paid or reimbursed to, or paid onbehalf of, the participating members, including but not limited to road show fees and expensesand due diligence expenses, would be underwriting compensation.39 Consistent with currentpractice, the proposed rule change would also include in underwriting compensation non-cashcompensation.40According to FINRA, the proposed examples of payments or benefits that would not beunderwriting compensation include several new examples to provide greater clarity and toaddress questions raised by members. For instance, the proposed rule change would clarify thatthe following would not be considered underwriting compensation: (1) payments for recordsmanagement and advisory services received by members in connection with some corporatereorganizations;41 (2) payment or reimbursement of legal costs resulting from a contractualbreach or misrepresentation by the issuer;42 (3) securities acquired pursuant to a governmental or38See proposed Supplementary Material .01 to Rule 5110.39See proposed Supplementary Material .01(a)(2) to Rule 5110. See also proposedSupplementary Material .01(a)(3) and (4) to Rule 5110 which includes fees and expensesof participating members’ counsel and finder’s fees paid or reimbursed to, or paid onbehalf of, the participating members (except for reimbursement of “blue sky” fees) asunderwriting compensation.40See proposed Supplementary Material .01(a)(14) to Rule 5110.41See proposed Supplementary Material .01(b)(3) to Rule 5110.42See proposed Supplementary Material .01(b)(4) to Rule 5110.10
court approved proceeding or plan of reorganization as a result of action by the government orcourt (e.g., bankruptcy or tax court proceeding);43 (4) non-convertible securities purchased by theparticipating member in a public offering at the public offering price during the review period;44(5) accountable expenses received pursuant to Rule 5110(g)(5)(A);45 and (6) compensationreceived through an employee benefit plan that qualifies under Section 401 of the InternalRevenue Code or a similar plan.46In addition, the proposed rule change would take a principles-based approach inconsidering whether issuer securities acquired from third parties or in directed sales programsmay be excluded from underwriting compensation. Such approach would start with the43See proposed Supplementary Material .01(b)(22) to Rule 5110. .44Specifically, FINRA proposes in
Partial Amendment No. 2 to the proposal.11 This order provides notice of filing of Partial Amendment No. 2 and approves the proposal, as modified by Partial Amendments No. 1 and No. 2, on an accelerated basis. II. Description of the Proposed Rule Change Below is a description of FINRA’s proposal as modified by Partial Amendment No. 1,
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American Revolution: Events Leading to War To view this PDF as a projectable presentation, save the file, click “View” in the top menu bar of the file, and select “Full Screen Mode To request an editable PPT version of this presentation, send a request to CarolinaK12@unc.edu. 1660: The Navigation Acts British Action: – Designed to keep trade in England and support mercantilism .
