FINRA’s Change to Rules 5122 and 5123

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.

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SEC Rule to Simplify Exempt Offering Framework for Small Firms

SEC Rule to Simplify Exempt Offering Framework for Small Firms

On Nov. 2, 2020, the U.S. Securities and Exchange Commission (SEC) adopted final rules to simplify the exempt offering framework. The SEC’s goal with these amendments was to “simplify, harmonize, and improve certain aspects of the exempt offering framework to promote capital formation while preserving or enhancing important investor protections.”. More Specifically they aimed to:

  • Address the ability of issuers to move from one exemption to another;
  • Set clear and consistent rules governing offering communications between investors and issuers;
  • Address potential gaps and inconsistencies in their rules relating to offering and investment limits; and
  • Harmonize certain disclosure requirements and bad actor disqualification provisions.

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FINRA’s Proposed Change to Rules 5122 and 5123

FINRA’s Proposed Change to Rules 5122 and 5123

On October 28, 2020, FINRA filed a proposed rule change to amend Rules 5122 (Private Placements of Securities Issued by Members) and 5123 (Private Placements of Securities) that would require members to file retail communications concerning Private Placement offerings. Previously, Rules 5122 and 5123 required all offering documents to be filed with FINRA. However, they weren’t specific enough to include all documents that should have been considered offering documents, such as retail communications.

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Compliance Surveillance

Compliance Surveillance Trends During COVID-19

The messages are clear. Sales practice concerns, fraud, and operational issues related to the COVID-19 pandemic have arrived. Compliance professionals who are responsible for the surveillance and review of targeted areas of the compliance program should understand what may be coming down the pipe and ensure that their programs are sufficiently flexible to identify potential red flags.

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Private Placement Basics – Part II

[Continued from Private Placement Basics – Part I]

Due Diligence and the Suitability of Private Placements

The SEC’s recent amendments to Regulation D in accordance with the JOBS Act do not diminish a firm’s responsibility to conduct adequate due diligence on its offerings to ensure that any recommendations made to potential investors to purchase securities in a private placement are suitable. Additionally, as private placement sales activities continue to be among FINRA’s list of regulatory hot topics, FINRA will examine firms’ private placement activity to determine if firms are taking reasonable steps to confirm that investors meet accredited investor standards.

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private placement

Private Placement Basics – Part I

Broker-dealers that are active in the sale or solicitation of private placement offerings have additional requirements under FINRA and SEC rules. These requirements include filing certain offering documents with reference to any investments solicited and/or sold to clients of the firm. Read More…