FINRA Files Proposed Amendments to its Corporate Financing Rule | Practical Law

FINRA Files Proposed Amendments to its Corporate Financing Rule | Practical Law

FINRA filed with the SEC proposed amendments to FINRA Rule 5110, its corporate financing rule.

FINRA Files Proposed Amendments to its Corporate Financing Rule

Practical Law Legal Update 3-555-7266 (Approx. 3 pages)

FINRA Files Proposed Amendments to its Corporate Financing Rule

by Practical Law Corporate & Securities
Published on 28 Jan 2014 • USA (National/Federal)
FINRA filed with the SEC proposed amendments to FINRA Rule 5110, its corporate financing rule.
On January 24, 2014, FINRA filed proposed amendments to FINRA Rule 5110, its corporate financing rule, to permit additional deferred compensation arrangements in connection with public offerings. Under the proposed amendments, termination fees and rights of first refusal (ROFRs) in engagement letters or other written agreements would be permitted if all of the following conditions are satisfied:
  • The agreement specifies that the issuer has a right of termination for cause, which includes the FINRA member's material failure to provide the services contemplated in the agreement.
  • An issuer's termination for cause eliminates any obligations to pay any termination fee or provide any ROFR.
  • The amount of any termination fee is reasonable in relation to the services contemplated in the agreement and, in the case of a ROFR, any fees arising from services provided under the ROFR are customary for those types of services.
  • The issuer is not responsible for paying a termination fee unless the offering or other transaction specified in the agreement is consummated within two years of the date the engagement is terminated by the issuer.
Similar to current Rule 5110, under the amendments, a ROFR would not be permitted to provide for more than one opportunity to waive or terminate the ROFR in consideration of any payment or fee. Also, the duration of any ROFR provided to the underwriter or related persons to underwrite or participate in any future public offering, private placement or other financing may not have a duration of more than three years from:
  • The date of commencement of sales in the public offering.
  • The date the engagement is terminated.
In addition, the proposed amendments would:
  • Exempt from the filing requirement offerings of securities issued by exchange-traded funds (ETFs) that are formed as grantor or statutory trusts, even though the issuing entity does not fall under the definition of investment company under the Investment Company Act of 1940.
  • Make clarifying, non-substantive rule changes relating to documents filed through FINRA's electronic filing system.
FINRA will announce the implementation date of the proposed amendments in a regulatory notice no later than 60 days after approval by the SEC. The effective date of the proposed amendments will be no later than 120 days after SEC approval.
Update: On February 4, 2014, FINRA filed an amendment which made minor changes to the proposal.
Update: On March 31, 2014, FINRA filed a second amendment which made minor changes to the proposal.
To learn more about the role of FINRA in registered securities offerings, see Practice Note, FINRA and Securities Offerings: The Road to No Objections.