
[Federal Register Volume 77, Number 17 (Thursday, January 26, 2012)]
[Notices]
[Pages 4065-4068]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-1581]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66203; File No. SR-FINRA-2011-057]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Partial Amendment No. 1 and Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change, as Modified by Partial Amendment No. 1, To Adopt 
FINRA Rule 5123 (Private Placements of Securities) in the Consolidated 
FINRA Rulebook

January 20, 2012.

I. Introduction

    On October 5, 2011, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``SEC'' or ``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 adopt FINRA Rule 5123. The 
proposed rule change was published for comment in the Federal Register 
on October 24, 2011.\3\ The Commission received 16 comment letters in 
response to the proposed rule change.\4\ On November 17, 2011, FINRA 
extended 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 January 20, 2012. On January 19, 2012, FINRA filed 
Partial Amendment No. 1 to the proposed rule change and a letter 
responding to comments.\5\ The Commission is publishing this notice and 
order to solicit comments on Partial Amendment No. 1 to the proposed 
rule change from interested persons and to institute proceedings 
pursuant to Section 19(b)(2)(B) of the Exchange Act to determine 
whether to approve or disapprove the proposed rule change, as modified 
by Partial Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Exchange Act Release No. 65585 (Oct. 18, 2011), 76 FR 
65758 (Oct. 24, 2011) (Notice of Filing of Proposed Rule Change to 
Adopt New FINRA Rule 5123 (Private Placements of Securities), SR-
FINRA-2011-057) (``Notice of Filing''). The comment period closed on 
November 18, 2011.
    \4\ See Letters from Ryan Adams, Christine Lazaro, Esq., and 
Lisa Catalano, Esq., St. John's School of Law Securities Arbitration 
Clinic, dated November 10, 2011 (``St. John's''); Ryan K. Bakhtiari, 
President, Public Investors Arbitration Bar Association, dated 
November 14, 2011 (``PIABA''); David T. Bellaire, Esq., Financial 
Services Institute, Inc., dated November 14, 2011 (``FSI''); Robert 
E. Buckholz, Chair, Committee on Securities Regulation, New York 
City Bar Association, dated November 9, 2011 (``NYC Bar''); Richard 
B. Chess, President, Real Estate Investment Securities Association, 
dated November 14, 2011 (``REISA''); Alicia M. Cooney, Managing 
Director, Monument Group (``Monument Group''), dated January 12, 
2012 (Monument Group); Martel Day, Chairman, Investment Program 
Association, dated November 14, 2011 (``IPA''); Jack E. Herstein, 
President, North American Securities Administrators Association, 
Inc., dated November 17, 2011 (``NASAA''); Joan Hinchman, Executive 
Director, National Society of Compliance Professionals, dated 
November 14, 2011 (``NSCP''); William A. Jacobson, Associate 
Clinical Professor, and Carolyn L. Nguyen, Cornell Law School, dated 
November 14, 2011 (``Cornell''); Stuart J. Kaswell, Executive Vice 
President, Managed Funds Association, dated November 14, 2011 
(``MFA''); William H. Navin, Senior Vice President, The Options 
Clearing Corporation, dated November 9, 2011 (``OCC''); Jeffrey W. 
Rubin, Chair, Federal Regulation of Securities Committee, American 
Bar Association, dated November 14, 2011 (``ABA''); Sullivan & 
Cromwell LLP, dated November 10, 2011 (``S&C''); Osamu Watanabe, 
Deputy General Counsel, Moelis & Co., dated November 28, 2011 
(``Moelis''); and Donald S. Weiss, K&L Gates LLP, dated November 14, 
2011 (``K&L Gates'') . Comment letters are available at www.sec.gov.
    \5\ See Letter from Stan Macel, FINRA, to Elizabeth Murphy, 
Secretary, SEC, dated January 19, 2012 (``Response Letter''). The 
text of proposed Partial Amendment No. 1 and FINRA's Response Letter 
are available on FINRA's Web site at http://www.finra.org, at the 
principal office of FINRA and at the Commission's Public Reference 
Room. FINRA's Response Letter is also available on the Commission's 
Web site at www.sec.gov.
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    Institution of these proceedings does not indicate that the 
Commission has reached any conclusions with respect to the proposed 
rule change, nor does it mean that the Commission will ultimately 
approve or disapprove the proposed rule change. Rather, as discussed 
below, the Commission seeks additional input from interested parties on 
the issues presented by the proposed rule change, as modified by 
Partial Amendment No. 1, and on FINRA's Response Letter.

[[Page 4066]]

II. Description of the Proposed Rule Change and Summary of Comments

    FINRA is proposing to adopt FINRA Rule 5123, which, prior to 
Partial Amendment No. 1, would have required that members and 
associated persons that offer or sell any applicable private placement 
(as described in the proposed rule change), or participate in the 
preparation of a private placement memorandum (``PPM''), term sheet or 
other disclosure documents in connection with any such private 
placement, provide relevant disclosures to each investor prior to sale 
describing the anticipated use of offering proceeds, and the amount and 
type of offering expenses and offering compensation. If any issuer's 
disclosure documents did not contain the requisite information about 
the offering expenses and use of proceeds, the proposed rule change 
would have required the member to create and provide to any potential 
investor a separate disclosure document containing this information. 
FINRA Rule 5123 also would have required that each participating member 
file the PPM, term sheet or other disclosure document, and any exhibits 
thereto, with FINRA no later than 15 calendar days after the date of 
the first sale, and any material amendments to such document, or any 
amendments to any disclosures mandated by the proposed rule change, 
also were required to be filed no later than 15 calendar days after the 
date such document was provided to any investor or prospective 
investor, as discussed further below.
    While some commenters expressed support for the goals of the 
proposed rule change,\6\ the remaining commenters expressed a broad 
range of concerns, such as: its scope, as derived from the definition 
of private placement; the broker-dealer disclosure requirements; the 
filing requirements; the exemptions; and whether the proposed rule 
change is consistent with FINRA's regulatory oversight and authority. 
In particular:

    \6\ Cornell; FSI; NASAA; PIABA; St. John's. Two of these 
commenters suggested FINRA members provide additional disclosure: 
NASAA recommended that the rule require members to provide 
additional risk disclosures to investors; Cornell urged FINRA to 
adopt a provision in the Proposed Rule to require a member to 
disclose any affiliation between the issuer and the member.
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     Several commenters argued that definition of private 
placement \7\ in the proposed rule change is overbroad and could be 
interpreted to apply to any offer or sale of securities for which an 
exemption from registration is claimed under the Securities Act of 
1933 (``Securities Act''), including public offerings and secondary 
market trading.\8\ For example, commenters stated that, due to the 
fact that it is not expressly limited to ``non-public'' offerings, 
the proposed definition is broader than the definition of ``private 
placement'' in FINRA Rule 5122 (Private Placements of Securities 
Issued by Members), which applies to member private offerings.\9\ 
The ABA, NYC Bar, and S&C suggested narrowing the scope of FINRA 
Rule 5123 to specific types of ``non-public'' offerings, or 
referring back to the definition of ``private placement'' in FINRA 
Rule 5122.
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    \7\ See proposed FINRA Rule 5123(a).
    \8\ ABA; NYC Bar; S&C. See also NASAA (seeking clarification as 
to the application of the Proposed Rule to secondary transactions of 
private placements). The ABA stated that the concept of a ``non-
public offering'' is well understood to mean a primary offering of 
securities that is exempt from registration under the Securities Act 
by reason of Section 4(2) thereof and the rules of the Commission 
thereunder (including Rule 506 of Regulation D). The NYC Bar stated 
that exemptions pursuant to Sections 3(b), 4(2) and 4(5) of the 
Securities Act are traditionally viewed as being ``private placement 
exemptions.''
    \9\ FINRA Rule 5122(a)(4) defines ``private placement'' as a 
``non-public offering of securities conducted in reliance on an 
available exemption from registration under the Securities Act'' 
(emphasis added).
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     Several commenters suggested that the requirement that 
each member provide applicable disclosure documentation to each 
investor in a private placement prior to a sale could be interpreted 
to require a FINRA member to have primary responsibility for 
preparing disclosure documents in the event that an issuer does not 
prepare them.\10\ Two commenters suggested that in some cases 
members may not have access to all necessary information from 
issuers \11\ and one of these two also stated that it may be 
impractical and inefficient for members to be charged with gathering 
and providing the required information.\12\ One commenter suggested 
that the production of a disclosure document by a FINRA member would 
increase the liability of the FINRA member in the offering.\13\ 
Another commenter suggested, as an alternative, that the proposed 
rule change prohibit a member from participating in a private 
placement if the issuer does not provide the mandated 
disclosures.\14\
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    \10\ ABA; NSCP; NYC Bar; REISA.
    \11\ ABA; NYC Bar.
    \12\ ABA.
    \13\ REISA.
    \14\ NYC Bar.
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     Two commenters argued that by requiring members to 
provide disclosures regarding private placements, the proposed rule 
change would be contrary to the intent of Congress and/or the 
federal securities laws, which do not otherwise prescribe these 
disclosures for many types of private placements.\15\
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    \15\ ABA; MFA.
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     Three commenters stated that the proposed rule change 
could significantly affect the ability of many issuers to raise 
capital.\16\ The ABA and MFA also stated that they believe that the 
proposed rule change is inconsistent with the Exchange Act.
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    \16\ ABA; MFA; REISA.
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     Commenters expressed concerns regarding exemptions, in 
most cases advocating to broaden proposed exemptions or to add new 
exemptions. Two commenters urged FINRA to adopt an explicit 
exemption for merger and acquisition transactions.\17\ The ABA 
suggested that FINRA exempt employees ``of the issuer or its 
affiliates'' and define affiliates to have the same meaning as in 
FINRA Rule 5121(f)(1). Cornell urged more clarity regarding the term 
``affiliate,'' noting that different definitions of the term exist 
in the federal securities laws.\18\ A few commenters urged FINRA to 
adopt additional exemptions for ``knowledgeable employees'' of a 
private fund, as defined in Rule 3c-5 of the Investment Company Act 
of 1940.\19\ MFA asked that other ``sophisticated investors'' that 
are purchasers of private funds be exempt from the requirements of 
the proposed rule change. In addition, Moelis suggested an exemption 
for ``employees of the broker dealer or its affiliates, who are 
accredited investors.'' Monument Group asked for an exemption either 
for ``all offers of private funds by registered independent 
placement agents,'' or alternatively for all ``offers to accredited 
investors.'' \20\ Monument Group also stated that, as proposed, the 
inclusion of a single purchaser who proved to be a ``mere accredited 
investor'' of an offering would cause the loss of the exemption for 
private placement offerings offered solely to ``institutional 
accounts, as defined in NASD Rule 3110(c)(4),'' as well as to 
``qualified purchasers, as defined in Section 2(a)(51)(A)'' of the 
Investment Company Act of 1940.
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    \17\ ABA; NYC Bar.
    \18\ See Cornell (noting the differing definitions of 
``affiliate'' in Securities Act Rule 144 and Exchange Act Rule 12b-
2).
    \19\ ABA; K&L Gates; see also MFA.
    \20\ Monument Group.
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     Several commenters stated that a single filing for each 
offering, rather than by each member, would be sufficient for the 
regulatory purposes of the proposed rule change and that the firm 
making the filing could be tasked with disclosing the other members 
of the selling group in offerings in which more than one firm 
participated.\21\

    \21\ ABA; FSI; IPA; NYC Bar; REISA; S&C.

    FINRA responded to the comments in its Response Letter and filed 
Partial Amendment 1.\22\
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    \22\ See supra, note 5.
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III. Description of Partial Amendment No. 1

    FINRA's proposed changes in response to comments, as set forth in 
Partial Amendment No. 1, are summarized below.
    First, FINRA is proposing to amend proposed FINRA Rule 5123 to 
clarify that the term ``private placement'' in the proposed rule change 
would mean a non-public offering of securities conducted in reliance on 
an available exemption from registration under the Securities Act. 
Accordingly, the proposed rule's private placement definition would be 
consistent with

[[Page 4067]]

FINRA Rule 5122 and would not apply to securities offered pursuant to 
the following provisions:
     Securities Act Sections 4(1), 4(3) and 4(4) (which 
generally exempt secondary transactions);
     Securities Act Sections 3(a)(2) (offerings by banks), 
3(a)(9) (exchange transactions with an existing holder, where no one is 
paid to solicit the exchange), 3(a)(10) (securities subject to a 
fairness hearing), or 3(a)(12) (securities issued by a bank or bank 
holding company pursuant to reorganization or similar transactions); or
     Section 1145 of the Bankruptcy Code (securities issued in 
a court-approved reorganization plan that are not otherwise entitled to 
the exemption from registration afforded by Securities Act Section 
3(a)(10)).\23\
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    \23\ See NYC Bar; S&C (advocating that the proposed rule not 
apply to these categories of securities).
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    Second, FINRA is proposing to amend the filing and disclosure 
requirements of the proposed rule change for those private placements 
for which a disclosure document includes a description of the 
anticipated use of offering proceeds, the amount and type of offering 
expenses, and the amount and type of compensation provided or to be 
provided to sponsors, finders, consultants, and members and their 
associated persons in connection with the offering. Members would be 
required to provide, prior to any sale, the disclosure document to each 
investor other than those investors in a private placement that would 
be subject to an exemption, as provided by the proposed rule change, as 
amended. Each member participating in the offering or a member 
designated to make the filing on behalf of all members identified in 
the filing would also be required to file such document with FINRA no 
later than 15 calendar days after the date of first sale.
    Third, FINRA is proposing to amend the filing and disclosure 
requirements of the proposed rule change for those private placements 
for which there is no disclosure document. If no disclosure document is 
used, the participating member (or a designated member acting on behalf 
of the member) would, however, be required to make a notice filing, 
identifying the private placement and the participating members and 
stating that no disclosure document was used, with FINRA no later than 
15 calendar days after the date of first sale. The proposed rule change 
as amended would not prohibit a member from participating in such 
private placements. The proposed rule change would not require the 
member to make any additional disclosure to investors in such 
offerings.
    Fourth, FINRA is proposing to add supplementary material to the 
proposed rule change that would clarify that the rule would not require 
delivery of multiple copies of a disclosure document to a single 
customer. Specifically, the proposed rule change would require an 
affected member to deliver disclosure documents only to persons to whom 
it sells shares in the private placement.

IV. Proceedings To Determine Whether To Approve or Disapprove SR-FINRA-
2011-057 and Grounds for Disapproval Under Consideration

    In view of the issues raised by the proposed rule change, the 
Commission has determined to institute proceedings pursuant to Section 
19(b)(2) of the Exchange Act to determine whether to approve or 
disapprove FINRA's proposed rule change.\24\ Institution of such 
proceedings appears appropriate at this time in view of the legal and 
policy issues raised by the proposed rule change. As noted above, 
institution of proceedings does not indicate that the Commission has 
reached any conclusions with respect to any of the issues involved. 
Rather, the Commission seeks and encourages interested persons to 
comment on the proposed rule change and provide the Commission with 
arguments to support the Commission's analysis as to whether to approve 
or disapprove the proposed rule change.
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    \24\ 15 U.S.C. 78s(b)(2). Section 19(b)(2)(B) of the Exchange 
Act provides that proceedings to determine whether to disapprove a 
proposed rule change must be concluded within 180 days of the date 
of publication of notice of the filing of the proposed rule change. 
The time for conclusion of the proceedings may be extended for up to 
an additional 60 days if the Commission finds good cause for such 
extension and publishes its reasons for so finding or if the self-
regulatory organization consents to the extension.
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    The Commission is asking that commenters address the changes that 
FINRA proposes in Partial Amendment No. 1, the comments received on the 
Notice of Filing, and FINRA's Response Letter, in addition to any other 
comments they may wish to submit about the proposed rule change. The 
Commission requests comment, in particular, on the following aspects of 
the proposed rule change, as modified by Partial Amendment No. 1:

    (1) the categories of offerings that would be subject to the 
proposed rule change under the proposed definition of ``private 
placement;''
    (2) the potential impact on investors purchasing private 
placement securities through a broker-dealer subject to the proposed 
rule change;
    (3) the potential impact on members of having to comply with the 
proposed rule change, including any burdens associated with 
implementing the obligations of the proposed rule change; and
    (4) the potential impact on competition and capital formation, 
including: (a) Whether members would continue to participate in 
private placements subject to the proposed rule change; (b) whether 
the proposed rule change would encourage issuers to utilize 
unregistered firms to effect their covered offerings; and (c) 
whether the proposed rule change would affect access to capital, the 
costs of capital raising or the cost of capital for issuers.

    Pursuant to Section 19(b)(2)(B) of the Exchange Act,\25\ the 
Commission is providing notice of the grounds for disapproval under 
consideration. In particular, Section 15A(b)(6) of the Exchange Act 
\26\ requires, among other things, that FINRA rules must 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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    \25\ 15 U.S.C. 78s(b)(2)(B).
    \26\ 15 U.S.C. 78o-3(b)(6).
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    The Commission believes FINRA's proposed rule change, as amended, 
raises questions as to whether it is consistent with the requirements 
of Section 15A(b)(6) of the Exchange Act, including whether FINRA's 
proposed rule change, as amended, would prevent fraudulent and 
manipulative acts, promote just and equitable principles of trade, and 
protect investors and the public interest and also whether the proposed 
rule change is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers, to fix minimum profits, to 
impose any schedule or fix rates of commissions, allowances, discounts, 
or other fees to be charged by its members, or to regulate any matters 
not related to the purposes of the Exchange Act or the administration 
of FINRA.
    The Commission also believes FINRA's proposed rule change, as 
amended, raises questions as to whether it is consistent with the 
findings that the Commission must make as set forth in Section 3(f) of 
the Exchange Act, including whether FINRA's proposed rule change, as 
amended, would promote efficiency, competition, and capital formation.

V. Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues

[[Page 4068]]

identified above, as well as any others they may have identified with 
the proposed rule change, as amended. In particular, the Commission 
invites the written views of interested persons concerning whether the 
proposed rule change, as modified by Partial Amendment No. 1, is 
inconsistent with Section 15A(b)(6) or any other provision of the 
Exchange Act, or the rules and regulations thereunder.
    Although there do not appear to be any issues relevant to approval 
or disapproval which would be facilitated by an oral presentation of 
views, data, and arguments, the Commission will consider, pursuant to 
Rule 19b-4, any request for an opportunity to make an oral 
presentation.\27\
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    \27\ Section 19(b)(2) of the Exchange Act, as amended by the 
Securities Acts Amendments of 1975, Public Law 94-29, 89 Stat. 97 
(1975), grants the Commission flexibility to determine what type of 
proceeding--either oral or notice and opportunity for written 
comments--is appropriate for consideration of a particular proposal 
by a self-regulatory organization. See Securities Acts Amendments of 
1975, Report of the Senate Committee on Banking, Housing and Urban 
Affairs to Accompany S. 249, S. Rep. No. 75, 94th Cong., 1st Sess. 
30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments by [insert date 30 days from publication in the Federal 
Register] concerning Partial Amendment No. 1 and regarding whether the 
proposed rule change, as modified by Partial Amendment No. 1, should be 
approved or disapproved. Any person who wishes to file a rebuttal to 
any other person's submission must file that rebuttal by March 12, 
2012. Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2011-057 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2011-057. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of FINRA. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make publicly available.
    All submissions should refer to File Number SR-FINRA-2011-057 and 
should be submitted on or before February 27, 2012. Rebuttal comments 
should be submitted by March 12, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).
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Kevin M. O'Neil,
Deputy Secretary.
[FR Doc. 2012-1581 Filed 1-25-12; 8:45 am]
BILLING CODE 8011-01-P


