SEC Approves New FINRA Filing Requirements

Investment Management Update

Date: September 12, 2012


On June 7, 2012, the SEC approved FINRA Rule 5123, which creates new filing requirements for FINRA members that sell securities in a private placement. The new rule will go into effect on December 12, 2012. FINRA believes the information obtained through compliance with these new requirements will help detect and prevent fraud in connection with private placements.

Under this new rule, a FINRA member selling securities in a private placement is required to submit to FINRA a copy of any private placement memorandum (PPM), term sheet or other offering document (including exhibits) used in connection with such a sale. These documents must be submitted within 15 calendar days of the date of the first sale by that member. Any material amendments to a previously filed document must also be submitted within 15 days of the date such document is provided to any investor. If no such offering documents were used, the firm must indicate this to FINRA.

To comply with FINRA Rule 5123, members will use an electronic filing system accessed through their Firm Gateway accounts to submit their filings via PDF. A firm can submit a filing on behalf of other firms involved in the private placement as long as those firms are identified.

There are several exemptions to the rule's requirements. First, the requirements do not apply to certain types of offerings:

  • Offerings of exempted securities, as defined by Section 3(a)(12) of the Exchange Act.
  • Offerings made pursuant to Securities Act Rule 144A or SEC Regulation S.
  • Offerings of exempt securities with short-term maturities under Section 3(a)(3) of the Securities Act and debt securities sold by members pursuant to Section 4(2) of the Securities Act, so long as the maturity does not exceed 397 days and the securities are issued in minimum denominations of $150,000 (or the equivalent thereof in another currency).
  • Offerings of subordinated loans under SEA Rule 15c3-1, Appendix D (see NASD Notice to Members 02-32 (June 2002)).
  • Offerings of "variable contracts," as defined in Rule 2320(b)(2).
  • Offerings of modified guaranteed annuity contracts and modified guaranteed life insurance policies, as referenced in Rule 5110(b)(8)(E).
  • Offerings of nonconvertible debt or preferred securities that meet the transaction eligibility criteria for registering primary offerings of nonconvertible securities on Forms S-3 and F-3.
  • Offerings of securities issued in conversions, stock splits and restructuring transactions that are executed by an already existing investor without the need for additional consideration or investments on the part of the investor.
  • Offerings of securities of a commodity pool operated by a commodity pool operator, as defined under Section 1a(11) of the Commodity Exchange Act.
  • Business combination transactions, as defined in Securities Act Rule 165(f).
  • Offerings of registered investment companies.
  • Standardized options, as defined in Securities Act Rule 238.
  • Offerings filed with FINRA under Rules 2310, 5110, 5121 or 5122, or exempt from filing thereunder in accordance with Rule 5110(b)(7).

Furthermore, FINRA Rule 5123 has exemptions for offerings sold only to any one or more of certain types of purchasers:

  • Institutional accounts, as defined in Rule 4512(c).
  • Qualified purchasers, as defined in Section 2(a)(51)(A) of the Investment Company Act.
  • Qualified institutional buyers, as defined in Securities Act Rule 144A.
  • Investment companies, as defined in Section 3 of the Investment Company Act.
  • Entities composed exclusively of qualified institutional buyers, as defined in Securities Act Rule 144A.
  • Banks, as defined in Section 3(a)(2) of the Securities Act.
  • Employees and affiliates, as defined in Rule 5121 of the issuer.
  • Knowledgeable employees, as defined in Investment Company Act Rule 3c-5.
  • Eligible contract participants, as defined in Section 3(a)(65) of the Exchange Act.
  • Accredited investors, as described in Securities Act Rules 501(a)(1), (2), (3) or (7).

FINRA has stated that any regulatory response to a potential violation of this rule will depend on the facts and circumstances of the situation, and any sanction imposed by FINRA is subject to oversight and review by the SEC.

FINRA also has noted that it will continue to afford confidential treatment to all documents and information filed and will use these materials only for the purpose of determining compliance with FINRA rules and other regulatory purposes.