Notice2021-12474
Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving Proposed Rule Change, as Modified by Amendment No. 1, to FINRA 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 That Are Subject to Those Rules' Filing Requirements
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
June 15, 2021
Issuing agencies
Securities and Exchange Commission
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<title>Federal Register, Volume 86 Issue 113 (Tuesday, June 15, 2021)</title>
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[Federal Register Volume 86, Number 113 (Tuesday, June 15, 2021)]
[Notices]
[Pages 31764-31769]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-12474]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92133; File No. SR-FINRA-2020-038]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving Proposed Rule Change, as Modified by
Amendment No. 1, to FINRA 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 That Are Subject to Those Rules' Filing
Requirements
June 9, 2021.
I. Introduction
On October 28, 2020, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend FINRA Rules 5122
(Private Placements of Securities Issued by Members) and 5123 (Private
Placements of Securities) that would require members to file certain
retail communications concerning private placements.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The proposed rule change was published for comment in the Federal
Register on November 6, 2020.\3\ On December 11, 2020, FINRA consented
to an extension of the time period in which the Commission must approve
the proposed rule change, disapprove the proposed rule change, or
institute proceedings to determine whether to approve or disapprove the
proposed rule change to February 4, 2021.\4\ On January 12, 2021, FINRA
responded to five comment letters received in response to the Notice
and filed an amendment to the proposed rule change (``Amendment No.
1'').\5\ On January 29, 2021, FINRA responded to a sixth comment letter
received in response to the Notice.\6\ On February 4, 2021, the
Commission filed an Order Instituting Proceedings to determine whether
to approve or disapprove the proposed rule change, as modified by
Amendment No. 1.\7\ The Commission received no comments in response to
the OIP. On April 12, 2021, FINRA responded to a seventh comment letter
received in response to the Notice.\8\ On May 4, 2021, FINRA consented
to an extension of the time period in which the Commission must approve
or disapprove the proposed rule change to May 26, 2021.\9\ On May 25,
2021, FINRA consented to an extension of the time period in which the
Commission must approve or disapprove the proposed rule change to June
9, 2021.\10\ This order approves the proposed rule change, as modified
by Amendment No. 1.
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\3\ See Exchange Act Release No. 90302 (Nov. 2, 2020), 85 FR
71120 (Nov. 6, 2020) (File No. SR-FINRA-2020-038) (``Notice'').
\4\ See letter from Joseph Savage, Vice President, Office of
General Counsel Regulatory Policy, FINRA, to Daniel Fisher, Branch
Chief, Division of Trading and Markets, Commission, dated December
11, 2020. This letter is available at <a href="https://www.finra.org/sites/default/files/2021-01/SR-FINRA-2020-038-Extension1.pdf">https://www.finra.org/sites/default/files/2021-01/SR-FINRA-2020-038-Extension1.pdf</a>.
\5\ See letter from Joseph P. Savage, Vice President and
Counsel, Office of General Counsel, FINRA, to Vanessa Countryman,
Secretary, Commission, dated January 12, 2021 (``FINRA January 12
Letter''). The FINRA January 12 Letter is available at the
Commission's website at <a href="https://www.sec.gov/comments/sr-finra-2020-038/srfinra2020038-8233135-227749.pdf">https://www.sec.gov/comments/sr-finra-2020-038/srfinra2020038-8233135-227749.pdf</a>. Amendment No. 1 is available
at <a href="https://www.finra.org/sites/default/files/2021-01/SR-FINRA-2020-038-Amendment1.pdf">https://www.finra.org/sites/default/files/2021-01/SR-FINRA-2020-038-Amendment1.pdf</a>.
\6\ See letter from Joseph P. Savage, Vice President and
Counsel, Office of General Counsel, FINRA, to Vanessa Countryman,
Secretary, Commission, dated January 29, 2021 (``FINRA January 29
Letter''). The FINRA January 29 Letter is available at the
Commission's website at <a href="https://www.sec.gov/comments/sr-finra-2020-038/srfinra2020038-8311262-228459.pdf">https://www.sec.gov/comments/sr-finra-2020-038/srfinra2020038-8311262-228459.pdf</a>.
\7\ See Exchange Act Release No. 91066 (Feb. 4, 2021), 86 FR
8970 (Feb. 10, 2021) (File No. SR-FINRA-2020-038) (``OIP'').
\8\ See letter from Joseph P. Savage, Vice President and
Counsel, Office of General Counsel, FINRA, to Vanessa Countryman,
Secretary, Commission, dated April 12, 2021 (``FINRA April 12
Letter''). The FINRA April 12 Letter is available at the
Commission's website at <a href="https://www.sec.gov/comments/sr-finra-2020-038/srfinra2020038-8662482-235305.pdf">https://www.sec.gov/comments/sr-finra-2020-038/srfinra2020038-8662482-235305.pdf</a>.
\9\ See letter from Joseph Savage, Vice President, Office of
General Counsel Regulatory Policy, FINRA, to Daniel Fisher, Branch
Chief, Division of Trading and Markets, Commission, dated May 4,
2021. This letter is available at <a href="https://www.finra.org/sites/default/files/2021-05/SR-FINRA-2020-038-Extension2.pdf">https://www.finra.org/sites/default/files/2021-05/SR-FINRA-2020-038-Extension2.pdf</a>.
\10\ See letter from Joseph Savage, Vice President, Office of
General Counsel Regulatory Policy, FINRA, to Daniel Fisher, Branch
Chief, Division of Trading and Markets, Commission, dated May 25,
2021. This letter is available at <a href="https://www.finra.org/sites/default/files/2021-05/SR-FINRA-2020-038-Extension3.pdf">https://www.finra.org/sites/default/files/2021-05/SR-FINRA-2020-038-Extension3.pdf</a>.
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II. Description of the Proposed Rule Change
For certain private placements of unregistered securities issued by
a FINRA member or a control entity \11\ (``member private
placements''), FINRA Rule 5122 requires the member or control entity to
provide prospective
[[Page 31765]]
investors \12\ with a private placement memorandum (``PPM''), term
sheet or other offering document that discloses the intended use of the
offering proceeds, the offering expenses, and the amount of selling
compensation that will be paid to the member and its associated
persons. Among other things, the current rule also requires a member to
file the PPM, term sheet or other offering document with FINRA's
Corporate Financing Department at or prior to the first time the
document is provided to any prospective investor, and to file any
amendments to such documents within 10 days of being provided to any
investor or prospective investor.\13\ Similarly, for certain private
placements of unregistered securities \14\ issued by a non-member,
FINRA Rule 5123 requires members or control persons to file with
FINRA's Corporate Financing Department any PPM, term sheet or other
offering document,\15\ including any material amended versions thereof,
used in connection with an offering within 15 calendar days of the date
of first sale.
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\11\ A ``control entity'' means any entity that controls or is
under common control with a member, or that is controlled by a
member or its associated persons. See FINRA Rule 5122(a)(2)-(3); see
also Notice at note 3.
\12\ Because of the types of private placements exempt from the
application of Rule 5122, FINRA believes that the rule applies
predominately to private placements sold to retail investors. See
Notice at 71121.
\13\ See Notice at 71120.
\14\ See Notice at note 8 (listing those types of member private
placements exempt from the filing obligations of Rule 5122,
including, among others, offerings sold solely to institutional
accounts, qualified purchasers, qualified institutional buyers,
investment companies, and banks).
\15\ Rules 5122 and 5123 do not enumerate the types of
information that might be considered ``other offering documents.''
However, FINRA has stated previously that an example of ``other
offering document'' is ``[a]ny other type of document that sets
forth the terms of the offering.'' See ``Frequently Asked Questions
(FAQ) About Private Placements,'' Question #10, available on
<a href="http://www.finra.org">www.finra.org</a>. The ``terms of an offering'' include facts such as
the amount of proceeds that the issuer intends to raise, the type of
security, descriptions or illustrations of the intended use of
proceeds, and explanations of tax benefits or other information that
would be relevant to an investor when deciding whether to make an
investment. See Notice at 71121.
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Separately, FINRA also requires broker-dealers to file with FINRA's
Advertising Regulation Department certain written communications that
they distribute or make available to retail customers to review those
written communications for compliance with the content requirements of
FINRA Rule 2210 (Communications with the Public).\16\ For example,
retail communications \17\ are required to comply with the general,
fair and balanced standards in FINRA Rule 2210.\18\ Despite these
existing obligations, FINRA has found a comparatively high rate of non-
compliance with Rule 2210 of retail communications concerning private
placements.\19\ Currently, some broker-dealers submit retail
communications as part of their Rules 5122 and 5123 filings either
voluntarily or as new members.\20\ In a 2018 spot check of these
filings, FINRA found that 76% of retail communications filed during the
spot check review period involved significant violations of Rule
2210.\21\ Further, FINRA stated that since January 1, 2014, it has
initiated 49 disciplinary actions related to non-compliant retail
communications concerning private placements. This number represents
21% of all actions involving private placements. According to FINRA,
these communications often present false or misleading information
regarding the underlying offering, which could result in significant
losses to investors and could undermine public trust in the private
placement markets.\22\
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\16\ See FINRA Rule 2210(c) (Filing Requirements and Review
Procedures).
\17\ FINRA Rule 2210(a)(5) defines a ``retail communication'' as
any written (including electronic) communication that is distributed
or made available to more than 25 retail investors within any 30
calendar-day period. See Regulatory Notice 20-21 (Jul. 2020)
(stating that a member firm that assists in the preparation of a PPM
or other offering document should expect that it will be considered
a communication with the public by that member firm for purposes of
Rule 2210); see also FINRA January 12 Letter. FINRA Rule 2210
generally does not require members to file private placement
communications. More specifically, there are no filing requirements
for communications distributed or made available only to
institutional investors, as defined in Rule 2210(a)(4), or
communications that are distributed or made available to 25 or fewer
retail customers within a 30-day period. Moreover, there is no
product-specific filing requirement for retail communications
concerning private placements in FINRA Rule 2210(c)(1) through (4)),
as those requirements apply only to retail communications concerning
specified registered securities, such as mutual funds or variable
products. Under FINRA Rule 2210(c)(1)(A), during the first year
after a member's registration is declared effective, the member must
file at least 10 business days prior to use any widely disseminated
retail communication (e.g., newspaper, television, or radio
advertisements and publicly available websites). However, FINRA Rule
2210(c)(7) excludes specified retail communications from the filing
requirements, including retail communications that were previously
filed with FINRA's Advertising Regulation Department and used
without material change ((c)(7)(A)); that do not make any financial
or investment recommendation or otherwise promote a product or
service of the member ((c)(7)(C)); or that are ``offering
documents'' similar to prospectuses (such as PPMs) concerning
securities that are exempt from registration ((c)(7)(F)).
\18\ All member communications must be based on principles of
fair dealing and good faith, must be fair and balanced, and must
provide a sound basis for evaluating the facts in regard to any
particular security or type of security, industry, or service. See
FINRA Rule 2210(d)(1)(A).
\19\ See Notice at 71122.
\20\ See Notice at 71223 (stating that members submit retail
communications as part of their Rule 5122 and 5123 private placement
filings while some others submit them through FINRA's Advertising
Regulation Department's filings review program under Rule 2210
either voluntarily or as new members) and at note 12 (citing FINRA
Rule 2210(c)(1)(A) requiring new members to file all widely-
distributed retail communications (such as publicly available
websites) that promote products or services of the firm during the
first year after the member's broker-dealer membership with FINRA's
Advertising Regulation Department is declared effective).
\21\ See Notice at 71122 (stating that the violations included
retail communications that: contained prohibited projections or
unreasonable forecasts; failed to provide a sound basis to evaluate
the facts with respect to the offering; failed to adequately
disclose the general risks associated with private placement
investments; or contained readily apparent false or misleading
statements or claims).
\22\ See id.
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To address this area of regulatory concern, FINRA proposed
amendments to Rules 5122 and 5123 that would require members or control
persons to file retail communications that ``promote or recommend'' a
private placement with FINRA's Corporate Financing Department, in
addition to the currently required PPMs, term sheets, and other
offering documents.\23\ The rules' requirements that material
amendments to offering documents must be filed also would apply to any
material amendments to retail communications concerning private
placements.\24\ The proposed rule change would provide FINRA with a
more timely opportunity to review retail communications concerning
private placements for compliance with its rules. Other than those
documents filed pursuant to Rule 2210, FINRA's review of such documents
is currently limited to its cycle and spot exams of its members.\25\
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\23\ Amendment 1 to the proposed rule change clarified that
members or control persons would be required to file any retail
communication that ``promotes or recommends'' a private placement,
rather than any retail communication that ``concerns'' a private
placement, as originally proposed.
\24\ See Notice at 71122.
\25\ See id.
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The proposed rule change would not, however, broaden the
application of the rules to capture those offerings that are currently
exempt from filing.\26\ The proposed rule change also would not impose
new filing fees on broker-dealers.\27\
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\26\ See e.g., supra note 14.
\27\ See Notice at 71122 and note 21.
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In addition, the proposed rule change would neither amend Rule 2210
nor, as FINRA states, alter FINRA's interpretation of the application
of that rule's requirements.\28\ Thus, if written communications
qualify as retail communications pursuant to FINRA Rule 2210, those
retail communications
[[Page 31766]]
would be subject to the proposed rule changes.
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\28\ See FINRA January 12 Letter, FINRA January 29 Letter, and
FINRA April 12 Letter.
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III. Discussion and Commission Findings
A. Discussion
After careful review of the proposed rule change, as modified by
Amendment No. 1, the comment letters, and FINRA's responses to the
comments, the Commission finds that the proposed rule change, as
modified by Amendment No. 1, is consistent with the requirements of the
Exchange Act and the rules and regulations thereunder that are
applicable to a national securities association.\29\ Specifically, the
Commission finds that the proposed rule change, as modified by
Amendment No. 1, is consistent with Section 15A(b)(6) of the Exchange
Act,\30\ which requires, among other things, that FINRA rules be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, and, in general, to
protect investors and the public interest.
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\29\ In approving this rule change, the Commission has
considered the rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\30\ 15 U.S.C. 78o-3(b)(6).
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Four commenters supported the proposed rule change.\31\ Two of
these commenters stated that the proposed rule change would establish
necessary investor protections in light of regulatory changes that have
expanded the marketplace for private placements.\32\ Specifically, one
stated that its state securities administrator members have observed
significant, recurring problems with private placements and that,
``[w]ith the SEC's recent regulatory changes to the private [placement]
marketplace, . . . the need for increased regulatory scrutiny of
private placement advertisements is even more acute.'' \33\ One other
supportive commenter stated that, because the number of persons who can
invest in private placements has increased substantially over the last
several decades, ``FINRA must keep an eye [on] private placement sales
abuses.'' \34\ One of the other supportive commenters stated that FINRA
and Commission rules already require members to keep detailed records
on marketing materials, which are routinely requested during cycle
examinations, and that the proposed rule changes could facilitate this
review process.\35\ The fourth supportive commenter stated that the
proposed rule changes are justified because they would help FINRA
``better ensure that retail communications used by broker-dealers in
retail private placements are fair, balanced and not misleading.'' \36\
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\31\ See letter from David P. Meyer, President, Public Investors
Advocate Bar Association, to Vanessa Countryman, Secretary,
Commission, dated November 27, 2020 (``PIABA Letter''); letter from
Lisa Hopkins President, General Counsel and Senior Deputy, North
American Securities Administrators Association, Inc., to J. Matthew
DeLesDernier, Assistant Secretary, Commission, dated November 24,
2020 (``NASAA Letter''); letter from James P. Dowd, North Capital
Private Securities Corp. and Public Brokers, LLC, to Secretary,
Commission, dated November 23, 2020 (``NCPSC Letter''); and letter
from Tom Selman, Founder, Scopus Financial Group, to Vanessa
Countryman, Secretary, Commission, dated November 22, 2020 (``Scopus
Letter'').
\32\ See NASAA Letter and PIABA Letter.
\33\ NASAA Letter (citing Securities Act Release No. 10824 (Aug.
6, 2020) (File No. S7-25-19) (updating the definition of
``accredited investor'' to identify more effectively investors that
have sufficient knowledge and expertise to participate in investment
opportunities that do not have the rigorous disclosure and
procedural requirements, and related investor protections, provided
by registration under the Securities Act of 1933); and Securities
Act Release No. 10884 (Nov. 2. 2020) (File No. S7-05-20) (improving
certain aspects of the exempt offering framework to promote capital
formation while preserving or enhancing important investor
protections)).
\34\ PIABA Letter (noting a rise in the percentage of American
households qualified as ``accredited investors'' since the
Commission first established the qualification standards in 1982).
\35\ See NCPSC Letter (referencing FINRA Rule 2210(b)(4)).
\36\ Scopus Letter. Communications with the public are subject
to FINRA Rule 2210's content standards, including its requirements
that communications be fair and balanced and not misleading. See
FINRA January 12 Letter.
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1. Requests for Guidance Under FINRA Rule 2210 (Communications With the
Public)
a. Issuer-Prepared Material
A supportive commenter requested that the Commission use this
opportunity to provide ``definitive guidance'' to members with respect
to the applicability of Rule 2210 to materials prepared and
disseminated by an issuer to the public, without the involvement of a
member firm or its registered representatives.\37\ In response, FINRA
stated that it has already addressed the applicability of Rule 2210 to
issuer-prepared communications.\38\ In particular, FINRA has previously
stated that ``[a member] that assists in the preparation of a private
placement memorandum or other offering document should expect that it
will be considered a communication with the public by that [member] for
purposes of . . . Rule 2210, FINRA's advertising rule.'' \39\
Similarly, FINRA has stated that sales literature concerning a private
placement that a member distributes will be deemed to constitute a
communication by that member with the public, whether or not the member
assisted in its preparation.\40\ Therefore, regardless of whether a
member distributes a retail communication that is attached to a PPM or
as a standalone document, it constitutes a member communication subject
to Rule 2210.\41\
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\37\ See NCPSC Letter.
\38\ FINRA January 12 Letter.
\39\ Id. (citing Regulatory Notice 20-21 (Jul. 2020) (quoting
Regulatory Notice 10-22 (Apr. 2010))).
\40\ See id.; see also Regulatory Notice 12-29 (Jun. 2012)
(stating that effective February 4, 2013, communications previously
defined as ``sales literature'' under NASD Rule 2210 (Communications
with the Public) fell within the definition of ``retail
communication'' in FINRA Rule 2210).
\41\ See FINRA January 12 Letter.
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FINRA's proposed rule change does not amend the definition of
``retail communications'' or change the scope of communications
captured within the definition of the term. Thus, the Commission
believes that interpretations of the definition of ``retail
communications'' are outside the scope of the proposed rule change.
However, FINRA stated that it has issued guidance on retail
communications concerning private placements, stating that, in general,
if a member distributes sales literature concerning a private placement
it will be deemed a communication by that member with the public
subject to Rule 2210.\42\ In addition, Rule 2210 prohibits members from
publishing, circulating, or distributing ``any communication that the
member knows or has reason to know contains any untrue statement of a
material fact or is otherwise false or misleading'' regardless of its
origin.\43\
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\42\ See supra note 38-41 and accompanying text.
\43\ FINRA Rule 2210(d)(1)(B); see also FINRA January 12 Letter.
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b. Performance Projections
Three commenters sought guidance regarding the application of FINRA
Rule 2210 to performance projections.\44\ A supportive commenter
requested that the Commission provide interpretive guidance under
Exchange Act Rule 10b-5 \45\ concerning the inclusion of
[[Page 31767]]
performance return objectives in private placement sales materials.\46\
Specifically, the commenter believes that because of Rule 2210's
restrictions on predicting or projecting performance,\47\ broker-
dealers are placed at a competitive disadvantage relative to private
placements that do not involve a broker-dealer (to which Rule 2010
would not apply), and that the Commission should ``level the playing
field.'' \48\
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\44\ See NCPSC Letter; letter from Anthony Chereso, President
and CEO, Institute for Portfolio Alternatives, to Vanessa
Countryman, Division of Investment Management [sic], Commission,
dated January 26, 2021 (``IPA Letter''); and letter from Mick Law
P.C., L.L.O. to Vanessa Countryman, Division of Investment
Management [sic], Commission, dated February 2, 2021 (``Mick
Letter'').
\45\ Under Exchange Act Rule 10b-5, it is unlawful for any
person, directly or indirectly, by the use of any means or
instrumentality of interstate commerce, or of the mails or of any
facility of any national securities exchange, to employ any device,
scheme, or artifice to defraud, to make any untrue statement of a
material fact or to omit to state a material fact necessary in order
to make the statements made, in the light of the circumstances under
which they were made, not misleading, or to engage in any act,
practice, or course of business which operates or would operate as a
fraud or deceit upon any person, in connection with the purchase or
sale of any security.
\46\ See NCPSC Letter.
\47\ See FINRA Rule 2210(d)(1)(F) (stating that, in general,
communications may not predict or project performance, imply that
past performance will recur or make any exaggerated or unwarranted
claim, opinion or forecast).
\48\ See id.
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In response, FINRA stated that, in general, Rule 2210(d)(1)(F)
prohibits member communications from predicting or projecting
performance or making any exaggerated or unwarranted claim, opinion or
forecast.\49\ More specifically, FINRA stated that retail
communications concerning private placements may not project or predict
returns to investors such as yields, income, dividends, capital
appreciation percentages or any other future investment
performance.\50\ However, FINRA also clarified that despite its
prohibition on certain types of performance predictions, its rules
permit retail communications concerning private placements to include
reasonable forecasts of issuer operating metrics (e.g., forecasted
sales, revenues or customer acquisition numbers) that may convey
important information regarding the issuer's plans and financial
position. FINRA stated that these presentations should provide a sound
basis for evaluating the facts, such as clear explanations of the key
assumptions underlying the forecasted issuer operating metrics and the
key risks that may impede achievement of the forecasted metrics.\51\
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\49\ See FINRA January 12 Letter.
\50\ See id. (citing Regulatory Notice 20-21 (Jul. 2020)).
\51\ See id.
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One commenter recommended that FINRA ``clarify the application of
its principles-based advertising rules to retail communications
concerning private placement[s].'' \52\ In particular, the commenter
recommended that FINRA provide interpretive guidance on the term
``performance projection'' to help members comply with FINRA Rule
2210(d)(1)(F).\53\ FINRA responded that the proposed rule change would
not amend or provide guidance on Rule 2210. Accordingly, FINRA believes
that the commenter's recommendation is outside the scope of the
proposed rule change.\54\
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\52\ IPA Letter.
\53\ See id.
\54\ See FINRA January 29 Letter.
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Another commenter described its experience evaluating the features
and risks of alternative investments marketed through private
placements and has found, like FINRA, many instances in which a
sponsor's offering promotional materials did not comply with FINRA Rule
2210.\55\ Thus, the commenter asked FINRA to further clarify Regulatory
Notice 20-21 to: (1) Explain what types of information constitute an
issuer's ``operating metrics'' \56\ and (2) clarify when members may
present information about ``distribution rates'' within retail
communications.\57\
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\55\ See Mick Letter.
\56\ See id.
\57\ See id.
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In response, FINRA stated that the commenter's concerns regard the
application of FINRA Rule 2210 rather than the filing requirements in
the proposed rule changes to Rules 5122 and 5123 that are the subject
of the rule filing.\58\ FINRA reiterated its guidance under Regulatory
Notice 20-21 but stated that it is willing to further discuss with its
members issues regarding particular retail communications that are
filed with FINRA, both before and after a communication is filed.\59\
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\58\ See FINRA April 12 Letter.
\59\ See id.
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Given that the proposed rule change does not change the
interpretation of retail communications, the Commission believes that
interpretations of the definition of ``retail communications'' are
outside the scope of the proposed rule change. However, FINRA stated
that it has existing guidance regarding the type of performance
projections a member can include, and is prohibited from including, in
its retail communications.
2. Other Suggested Rule Changes
One of the four commenters supporting the proposed rule change
suggested three additional changes ``to protect retail investors in the
private placement market.'' \60\ First, the commenter recommended that
FINRA combine Rules 5122 and 5123 into a single rule and that the
combined new rule should require (as does Rule 5122) disclosure about
the use of offering proceeds, offering expenses and selling
compensation, suggesting that providing investors these key pieces of
information about an offering is justified given the history of
problems in the private placement market. Third, the commenter
recommended that FINRA amend Rule 2210 so that it applies to PPMs, term
sheets, and other offering documents in retail private placements,
arguing that in the absence of a legal definition of ``private
placement memorandum'' it is difficult to distinguish a PPM from other
retail communications and it may be difficult to determine if a member
assisted in its preparation. Accordingly, the commenter recommended
that such offering documents be subject to the general content
standards of Rule 2210(d)(1).\61\
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\60\ Scopus Letter.
\61\ See id.
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In response, FINRA stated that the commenter's suggestions were
beyond the scope of the proposed rule change and could not be adopted
as part of this filing.\62\ The Commission agrees with FINRA that the
commenter's suggestions raise issues that go beyond the subject matter
of this proposal and therefore are beyond the scope of the proposed
rule change.
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\62\ See FINRA January 12 Letter.
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3. Non-Promotional Communications
One commenter expressed concern with the breadth of the
communications that would be required to be filed.\63\ The commenter
believes that requiring a member to file all ``retail communications
concerning a private placement'' could result in members being required
to file communications that are administrative in nature, such as
confirmations that a signature was received or reminders of actions
that investors still need to take.\64\ Instead, the commenter
recommended that FINRA narrow the scope of the filing requirement to
capture only ``those types of communications on which investors are
likely to base an investment decision,'' such as pitch decks or slide
shows.\65\
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\63\ See letter from Atish Davda, Co-Founder and Chief Executive
Office, Chris Giampapa, General Counsel, and Phil Haslett, Co-
Founder and Chief Revenue Officer, EquityZen Inc., to Vanessa A.
Countryman, Secretary, Commission, dated December 4, 2020.
\64\ See id.
\65\ See id.
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In response, FINRA noted that the examples of administrative
communications that the commenter identified likely would be directed
to a single or small group of investors, and thus would be
correspondence (which is not subject to filing) rather than retail
[[Page 31768]]
communications.\66\ Nevertheless, FINRA recognized that some of these
administrative and non-promotional communications may fall within the
definition of retail communication because they are distributed to more
than 25 retail investors within a 30-day period.\67\ Accordingly, FINRA
amended the proposed rule change to narrow the filing requirement to
any retail communication that ``promotes or recommends'' a member
private placement (Rule 5122) or other private placement (Rule 5123),
rather than a retail communication ``concerning'' such offerings.\68\
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\66\ See FINRA January 12 Letter. ``Correspondence'' is defined
as any written (including electronic) communication that is
distributed or made available to 25 or fewer retail investors within
any 30 calendar-day period. See Rule 2210(a)(2).
\67\ See supra note 17.
\68\ See FINRA January 12 Letter; see also supra note 5.
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The Commission believes that the proposed rule change in Amendment
No. 1 to apply the filing requirement only to a retail communication
that ``promotes or recommends'' a member private placement is designed
to protect investors and the public interest by appropriately narrowing
the filing requirement to those communications that pose the greatest
regulatory concern, and therefore improving the timeliness of FINRA's
review of private placement communications that might influence
investors' transaction decisions.
B. Commission Findings
Under Rules 5122 and 5123, broker-dealers are required to file with
FINRA's Corporate Financing Department any PPM, term sheet, or other
offering document used in connection with private placements, but these
rules do not currently require retail communications governed by Rule
2210 to be filed. Similarly, Rule 2210 generally does not require
broker-dealers to file with FINRA's Advertising Regulation Department
the materials they use to communicate with retail investors concerning
private placements. Accordingly, firms currently have no regulatory
obligation to submit retail communications concerning private
placements for review by FINRA. Currently, some broker-dealers submit
retail communications as part of their Rules 5122 and 5123 filings
either voluntarily or as new members.\69\ Given the comparatively high
rate of non-compliance with Rule 2210 in these private placement retail
communications, and the increased risk of investor harm associated with
those communications,\70\ FINRA proposed to amend Rules 5122 and 5123
to make such submissions mandatory, in addition to the currently
required PPMs, term sheets, and other offering documents.\71\ The
proposed rule change would not amend Rule 2210 or change FINRA's
interpretations of the rule.
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\69\ See supra note 20.
\70\ See supra note 19-22 and accompanying text.
\71\ See id.
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The Commission believes that the proposed rule change to require
members to file retail communications concerning private placements
would help prevent fraudulent and manipulative acts and practices by
facilitating FINRA's review of information about private placements
being disclosed to retail customers in those communications. Requiring
members to file retail communications concerning private placements
with FINRA's Corporate Financing Department would allow FINRA to review
the documents more efficiently and timely than it could by relying on
cycle reviews of its members. Through its reviews of the these retail
communications, FINRA would be able to more efficiently identify retail
communications about private placements that may not be fair and
balanced as required by FINRA Rule 2210, thereby reducing the potential
risk of customer harm from investing on the basis of misleading
communications. Moreover, given the high rate of non-compliance with
this fundamental communications standard, FINRA's increased ability to
review retail communications concerning private placements pursuant to
this proposed rule change would likely incentivize broker-dealers to
distribute those types of retail communications that are fair and
balanced in compliance with Rule 2210 and deter them from presenting
information in a manner that may cause investor harm. The Commission
believes that these changes are particularly important in light of the
expanded retail investor participation in the market for private
placements.\72\ The proposed rule change would help encourage the use
of fair and balanced communications to investors making investment
decisions.
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\72\ See supra notes 32-34 and accompanying text.
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Although some commenters requested clarification of specific
aspects of the application of FINRA Rule 2210, such as broker-dealers'
use of performance projections in their retail communications, and in
some cases sought guidance on specific factual scenarios, FINRA has
previously provided guidance on these issues and has offered to
continue to provide guidance as necessary. Moreover, the Commission
believes that these comments are beyond the scope of this proposed rule
change.\73\ Notably, the proposed rule change does not modify Rule
2210, does not change its application, nor does it subject any
additional communications to 2210's requirements.\74\
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\73\ Another commenter requested that the Commission require
issuers of new Regulation D offerings to disclose, at a minimum, the
use of offering proceeds and the offering expenses associated with
the offering, and that they be filed for review. See Scopus Letter.
The Commission believes that interpretations of its own regulatory
terms are beyond the scope of the proposed rule change.
\74\ A commenter also requested that FINRA combine Rules 5122
and 5123 into a single rule requiring (as does Rule 5122) disclosure
about the use of offering proceeds, offering expenses and selling
compensation. The Commission finds that this suggestion is also
beyond the scope of the proposed rule change.
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In sum, the Commission believes that the proposed rule change
addresses a problem identified by FINRA regarding the comparatively
high rate of non-compliance with Rule 2210 of retail communications
concerning private placements. The Commission believes that FINRA's
proposed rule change would improve the quality of information available
to retail investors about private placement securities offered by FINRA
members and strengthen FINRA's ability to monitor these communications
for potential violations of its rules thereby improving prospective
investors' confidence in these communications. FINRA has taken a number
of steps to narrowly tailor this proposed rule change in some key
respects: The proposed rule change would apply to types of retail
communications that have been found to have a high rate of
noncompliance with FINRA's fair and balanced standards; broker-dealers
would not have to pay a filing fee for their submissions; and the
proposed filing requirement has been narrowed to apply only to retail
communications concerning private placements that ``promote or
recommend'' a private placement security. Thus, for the reasons stated
above, we believe that the proposed rule change, as modified by
Amendment No. 1, is consistent with the provisions of Section 15A(b)(6)
of the Exchange Act because it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest.
[[Page 31769]]
IV. Conclusion
It is therefore ordered pursuant to Section 19(b)(2) of the
Exchange Act \75\ that the proposed rule change (SR-FINRA-2020-038), as
modified by Amendment No. 1, be, and hereby is, approved.
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\75\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\76\
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\76\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-12474 Filed 6-14-21; 8:45 am]
BILLING CODE 8011-01-P
</pre></body>
</html>Indexed from Federal Register on June 15, 2021.
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