FINRA Proposes Amendment to Corporate Financing Rule and Conflict of Interest Rule

FINRA Rule 5110, the corporate financing rule, regulates the terms and arrangements of securities underwriting conducted by FINRA member broker-dealers, which covers virtually all of the US securities industry. FINRA has proposed amendments to the corporate financing rule that would (a) exclude “independent financial advisers” from the application of the corporate financing rule, (b) limit lock-up restrictions for certain securities acquired or converted to prevent dilution, and (c) clarify information requirements for public offering filings. In addition, FINRA has also proposed to narrow the scope of the definition of “control” for purposes of FINRA Rule 5121, the conflict of interest rule, to exclude holders of subordinated debt. Separately, FINRA has proposed other amendments to the corporate financing rule that would (a) expand the circumstances under which FINRA member broker-dealers and issuers may negotiate termination fees and rights of first refusal and (b) exempt all exchange-traded funds from the filing requirements under that rule.

Introduction -

On January 9, 2014, the US Financial Industry Regulatory Authority, Inc. (“FINRA”) submitted proposed amendments to its Rule 5110 (the “Corporate Financing Rule”) and 5121 to the Securities and Exchange Commission (“SEC”). If adopted, the amendments (the “Amendment No. 1”) would (a) exclude “independent financial advisers” from being considered as “participating in a public offering;” (b) modify the lock-up restrictions under Rule 5110(g)(1) to exclude certain securities acquired or converted to prevent dilution; and (c) clarify that information requirements for filings submitted under Rule 5110 apply only to relationships with a “participating” member. In addition, FINRA has also proposed to narrow the scope of the definition of control in Rule 5121 (the “Conflict of Interest Rule,” and together with the Corporate Financing Rule, the “Rules”) by excluding beneficial owners of 10% or more of the outstanding subordinated debt of an entity.

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