The protections of FINRA Rule 5110 apply to members that are participating in a public offering of an issuer's securities. Rule 5110(a)(5) defines "participating in a public offering" to include:

The proposed rule change would amend the definition of "participating in a public offering" to provide that an independent financial adviser providing advisory or consulting services to an issuer would not be considered to be "participating" in a public offering of the issuer's securities. The amendments would define "independent financial adviser" as a member that both:

Under the proposal, if a member engages in solicitation or distribution activities in addition to providing advisory or consulting services, the proposed independent financial adviser exclusion would not be available to it and all compensation received by that member would be included in the compensation limitations of FINRA Rule 5110.

Because the Rule 5110(a)(5) definition of "participating member" includes affiliates of a member, if a member provides distribution or solicitation services and its affiliate provides advisory or consulting services, all compensation received by the member and its affiliate would be included in the compensation limitations of FINRA Rule 5110.

In the proposed rule change, FINRA suggested that the potential harms that Rule 5110 is designed to prevent are not likely to occur when a member provides only advisory or consulting services, as a member in that situation typically does not hold a substantial amount of leverage over an issuer. Further, the proposed rule change would make it easier for issuers to obtain advisory or consulting services from members not participating in the offering, since the current rule includes compensation for these services in the limits on overall underwriting compensation. Under the proposed rule change, issuers could seek the benefit of consulting services or advice from a member not engaged in the distribution or sale of securities regarding:

Rule 5110(d)(1) generally includes as underwriting compensation all items of value (which may include unregistered securities) that are acquired or arranged to be acquired within 180 days prior to the filing of a registration statement. Rule 5110(d)(5) sets out five exceptions that allow participating members to acquire issuer securities during this 180-day period without the securities being deemed underwriting compensation.

One of the exceptions, set out in Rule 5110(d)(5)(D), excludes from underwriting compensation the receipt of additional securities to prevent dilution of the investor's investment (for example, securities acquired as a result of a stock split or a pro-rata rights or similar offering) where the additional securities are received during the 180-day period or after the filing of the public offering, but where the original securities were acquired before the 180-day period or otherwise were not considered by FINRA to be underwriting compensation. The exception applies when securities are acquired as a result of:

Although acquisitions and conversions to prevent dilutions are not considered underwriting compensation, they are currently subject to the lock-up restrictions of Rule 5110(g)(1). That rule generally provides that these securities cannot be sold during the offering or sold or otherwise transferred or pledged (including through transactions resulting in the effective economic disposition of the securities) by any person for a period of 180 days immediately following the date of effectiveness or commencement of sales of the public offering.

FINRA suggested in the proposed rule change that subjecting securities acquired or converted to prevent dilution during the 180-day period to these lock-up restrictions, even when they are not considered items of value under Rule 5110(c)(3), may:

Therefore, the proposed rule change would eliminate the lock-up restrictions for shares received in an acquisition or conversion to prevent dilution during the 180-day period and would instead treat these shares consistently with the treatment provided for the earlier-acquired securities on which their acquisition or conversion was based.

With certain exceptions, Rule 5110(b)(6)(A)(iii) requires filers to provide information to FINRA about the affiliation or association with any member firm of the officers, directors and certain owners of the issuer. The proposed rule change would reduce the scope of this provision from requiring disclosure about the affiliation or association of the specified parties with any member to any participating member.

Because the compensation limitations and other provisions of FINRA Rule 5110 and FINRA Rule 5121 apply only to members that participate in a public offering, FINRA suggested that affiliations of non-participating members would not present the type of concerns that the rule is designed to address.