SEC Approves FINRA’s Rule Requiring Filing of Private Placements

July 10, 2012

On June 7, 2012, after accepting two more amendments from the Financial Industry Regulatory Authority (“FINRA”), the Securities and Exchange Commission approved FINRA Rule 5123 (“Private Placements of Securities”).1 Although the final rule is substantially narrower than FINRA’s original proposal, it will still impose some new requirements on broker-dealers selling private placements.


In January 2011, FINRA proposed an amendment to Rule 5122 to extend its reach beyond private placements of securities issued by the broker-dealer to nearly all private placements sold by broker-dealers [FINRA Proposes Expansion of Rule Governing Private Placements]. Meeting resistance, in October 2011, FINRA dropped that proposal, leaving Rule 5122 unchanged, and submitted to the SEC for approval proposed new Rule 5123.2 The new rule did not, however, meet less resistance. Commenters were particularly critical of the requirement that members either provide customers existing disclosure documents or create new ones that described the use of the offering proceeds, the amount and type of offering expenses, and the amount and type of compensation to be paid to sponsors, finders, consultants, FINRA members and their associated persons. Many also complained about the limited number of exemptions in the proposed rule. 

In January 2012, FINRA beat a partial retreat, submitting Partial Amendment No. 1. The amendment did away with the requirement that firms create a disclosure document if one did not exist, allowing the firm to instead make a notice filing “identifying the private placement and the participating members and stating that no disclosure document was used,” [FINRA Amends Proposal Requiring Filings for Private Placements]. If a disclosure document was used, the proposed rule, however, retained specific required content. Amendment No. 1 also added several additional exemptions. The SEC published the amended rule in the Federal Register, seeking further comment.

Further Retreat — More Amendments and the Final Rule

In response to the comments the SEC received, FINRA submitted two more amendments in March, marking a further narrowing of the rule’s requirements. These amendments removed the requirement that the disclosure documents include “a description of the anticipated use of the offering proceeds, the amount and type of offering expenses, and the amount and type of compensation provided or to be provided to sponsors, finders, consultants, and members and their associated persons in connection with the offering.” 

The final approved rule requires only that broker-dealers file any offering documents used in connection with the sale and any material amendments to those documents “within 15 calendar days of the date of first sale.” If no offering documents are used, the broker-dealer must make a notice filing that indicates that “no such offering documents were used.” In an offering in which more than one broker-dealer participates, one member of the group may be designated to make the necessary filing on behalf of the group. The rule also requires FINRA to “accord confidential treatment to all documents and information filed.”

The final rule also retains 23 different exemptions. Offerings made only to 10 different categories of investors are exempt (e.g., institutional accounts, qualified purchases under the ICA, qualified institutional buyers under Rule 144A, banks, accredited investors), as are 13 different types of offerings (e.g., offerings of exempted securities, 144A and Regulation S offerings, subordinated loan offerings). 

Final Impact

The final rule remains broad in that it may require broker-dealers to make filings on a wide number of private offerings; at the very least, broker-dealers will be required to review each private placement to determine whether it fits within an exemption.  The ultimate impact on the industry may depend on what use FINRA makes of the materials it receives. In its filings, FINRA pointed to a number of enforcement actions involving private placements to justify the need for a new rule to curb certain perceived abuses in this area. The rule itself states that FINRA may use the information “for the purposes of review to determine compliance with the provisions of applicable FINRA rules or other regulatory purposes deemed appropriate by FINRA.” If nothing else, the rule filings and the rule itself suggest that FINRA will continue to pay close attention to these transactions.

FINRA has not yet announced the effective date for the rule.

*This alert was co-authored by W. Hardy Callcott and Michael Weissmann.


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1 See Securities and Exchange Commission Release No. 34-67157 (June 7, 2012).

2 Although not expressly stated, the more restrictive requirements under Rule 5122 would trump Rule 5123’s requirements when the private placement is of the broker-dealer’s own securities.

This article was originally published by Bingham McCutchen LLP.