SEC Approval of Amendments to FINRA Corporate Financing Rules Will Reduce Burdens on Parties in Public Offerings

By Goodwin Procter LLP | Posted on

The Securities and Exchange Commission (SEC) recently approved two proposals by the Financial Industry Regulatory Authority, Inc. (FINRA) to amend FINRA Rules 5110 (the Corporate Financing Rule) and 5121 (the Conflicts of Interest Rule). The amendments include modifications that will affect not only underwriters and issuers in public offerings, but investment banks acting as independent financial advisors to issuers, and investment funds and other investors that are significant stockholders in public companies.

The amendments modify the rules as follows:

  1. The Corporate Financing Rule definition of “participation or participating in a public offering” now excludes the activities of any FINRA member that acts exclusively as an “independent financial adviser”;
  2. The Corporate Financing Rule no longer requires disclosure of affiliations of officers, directors and beneficial owners of 5% the issuer’s securities with FINRA members that are not “participating” in the subject public offering;
  3. Engagement letters in connection with the public offering can now provide for participating FINRA members to receive termination fees or rights of first refusal (RoFRs) if the FINRA member is terminated before the public offering is completed, as long as those termination fees or RoFRs are subject to certain conditions, including the right of the company to terminate the FINRA member for cause, ending the FINRA member’s right to termination fees;
  4. The definition of “control” under the Conflicts of Interest Rule no longer includes beneficial ownership of 10 % or more of the outstanding subordinated debt of an entity;
  5. Shares that a FINRA member or its affiliate acquires from “acquisitions and conversions to prevent dilution,” which were already excluded from underwriter compensation, are now also exempt from the lock-up restrictions of the Corporate Financing Rule;
  6. The Corporate Financing Rule no longer requires filings with the FINRA Corporate Financing Department for certain exchange-traded funds (ETFs).

Read the full article here.