FINRA’s Change to Rules 5122 and 5123

On July 15, 2021, FINRA released Regulatory Notice 21-26 announcing changes to FINRA Rules 5122 (Private Placements of Securities Issued by Members) and 5123 (Private Placements of Securities) effective October 1, 2021. The changes will require members to file retail communications that promote or recommend private placement offerings that are subject to those rules’ filing requirements.

Background

As we stated in our previous blog on the topic, FINRA’s Proposed Change to Rules 5122 and 5123, while FINRA did not require retail communications be filed, many members filed them voluntarily. After reviewing the voluntary submissions, FINRA found they raised more compliance issues than those for other products. Of the 1,726 retail communications received, 41% required revisions to comply with applicable standards. There were also 4% that were so non compliant with the rules that FINRA issued “do not use” review letters.

FINRA stated that many of these retail communications included violations such as the inclusion of prohibited projections of performance or unreasonable forecasts like, “Return 4-6x invested capital net of fees” as well as false or misleading statements, like “Safety of Principle”.

After discovering the comparatively high rate of non-compliance of Private Placement retail communications and the clear and present risk to investors who received them, FINRA proposed to amend Rules 5122 and 5123 to make filing retail communications for Private Placements a requirement.

Changes

FINRA has amended Rules 5122 and 5123 to require firms to file with the Corporate Financing Department retail communications that promote or recommend a private placement offering subject to those rules’ filing requirements, in addition to the currently required PPMs, term sheets and other offering documents. The amendments do not apply to any offerings that are currently exempt from filing, such as sales exclusively to institutional accounts. The amendments will require a member to file such retail communications with Corp Fin no later than the date on which the member must file the private placement offering documents under Rules 5122 and 5123.

FINRA expects that members will file most retail communications with Corp Fin at the same time and in the same manner that they file their PPMs, term sheets and other offering documents. The rules’ requirements that members file material amendments to offering documents also will apply to material amendments to retail communications.

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