Financial Services Weekly News: SEC Amends FINRA IPO Allocations Rules



SEC Approves Amendments to FINRA IPO Allocations Rules on Accelerated Basis

On November 5, the SEC approved proposed amendments to FINRA Rule 5130 (Restrictions on the Purchase and Sale of Initial Equity Public Offerings) and Rule 5131 (New Issue Allocations and Distributions). Rule 5130 prohibits the sale of IPO shares and other new issues by underwriters to “restricted persons” as defined in the rule. Rule 5131 contains several prohibitions and other conditions in connection with the allocation and distribution of new issues. Rule 5131(b) specifically prohibits “spinning” – the sale of new issues to the executive officers and directors of public companies and other covered companies to whom the underwriter has provided, or expects to provide, investment banking services. The rules contain a number of exemptions and exclusions which are identical with a few exceptions. The amendments to the rules, for the most part, expand the exemptions and exclusions in helpful ways. Changes include: (i) expanding the category of persons who may own a “family investment vehicle,” which is excluded from the definition of “collective investment account,” to include not only immediate family members but also other family members and family clients, both as defined in Rule 202(a)(11)(G)-1 under the Investment Advisers Act; (ii) excluding sovereign entities from the category of persons who are restricted on the basis of ownership of a broker-dealer; (iii) adding an exemption for certain foreign employee retirement benefit plans if the plan, or family of plans, has at least 10,000 participants and $10 billion in assets; (iv) providing alternative conditions for the foreign investment company exemption; (v) excluding from the rule sales by foreign non-member brokers participating in the syndicate and selling to non-U.S. persons; (vi) expanding the exception for issuer-directed offerings to include allocations directed by affiliates and selling shareholders of the issuer; and (vii) applying the anti-dilution provisions of Rule 5130 to allocations under Rule 5131(b) as well.

The SEC approved the proposed rules on an accelerated basis, prior to the 30th day after publication of notice of filing in the Federal Register. If FINRA follows its standard practice, it will publish a regulatory notice announcing the effective date of the amendments. Investment banks and collective investment accounts, such as hedge funds and private equity funds, should prepare to amend their Rule 5130 and 5131 questionnaires to incorporate the changes to the definitions and general exemptions. Fund managers may continue to rely on existing questionnaires from their investors, because the changes do not narrow or restrict exemptions that are currently applicable.

SEC Proposes Amendments to Modernize Shareholder Proposal Rule

On November 5, the SEC proposed amendments to Rule 14a-8 under the Securities Exchange Act of 1934, also known as the shareholder proposal rule. The rule requires companies that are subject to the federal proxy rules to include shareholder proposals in their own proxy statements to shareholders, subject to certain procedural and substantive requirements. The proposed amendments modify two of Rule 14a-8’s procedural requirements and one of its substantive requirements:

  • The first proposed amendment is to paragraph (b) of the rule, which establishes the ownership requirements a shareholder-proponent must satisfy to be eligible to submit a shareholder proposal. Under the SEC’s proposed amendment, a shareholder-proponent would be eligible to submit a proposal if the shareholder-proponent has continuously held at least (i) $2,000 of the company’s securities entitled to vote on the proposal for at least three years; (ii) $15,000 of the company’s securities entitled to vote on the proposal for at least two years; or (iii) $25,000 of the company’s securities entitled to vote on the proposal for at least one year. The SEC also proposes to eliminate the current 1% ownership threshold, which historically has not been utilized.
  • The second proposed amendment is to paragraph (c) of the rule, which provides that each shareholder-proponent may submit no more than one proposal to a company for a particular shareholders’ meeting. The SEC proposes to clarify the existing rule by applying it to “each person” rather than “each shareholder” who submits a proposal. This would prevent a single person from submitting multiple proposals at the same shareholder’s meeting, whether the person submits a proposal as a shareholder or as a representative of a shareholder.
  • The third proposed amendment is to paragraph (i)(12) of the rule, which allows companies to exclude a shareholder proposal if substantially the same proposal, or substantially the same subject matter, had previously been submitted during the relevant lookback period and did not meet certain minimum vote thresholds. Under the SEC’s proposed amendment, the levels of shareholder support a proposal must receive to be eligible for resubmission at the same company’s future shareholder meetings would be increased from 3%, 6%, and 10%, to 5%, 15%, and 25%, respectively. The proposed amendment also adds an additional provision to the rule that would allow companies to exclude proposals that have been submitted three or more times in the preceding five years if they received more than 25%, but less than 50%, of the vote and experienced a decline in support of 10% or more compared to the prior year.

The public may comment on the proposed amendments until 60 days after publication in the Federal Register.

SEC Proposes Rule Amendments to Improve Accuracy and Transparency of Proxy Voting Advice

On November 5, the SEC proposed amendments to certain of its rules regulating proxy advisers. The proposal, which is part of the SEC’s ongoing focus on improving the proxy process and the ability of shareholders to exercise their voting rights, would reshape the existing regulatory framework that exempts proxy advisers from the filing and information requirements of the federal proxy rules. The proposed amendments would amend three rules under the Securities Exchange Act of 1934:

  • Rule 14a-1(l). The proposed amendments, which codify the SEC’s August 21 guidance, would amend the rule’s definitions of “solicit” and “solicitation” to specify the circumstances when a proxy adviser will be deemed to be engaged in a solicitation subject to the rules. This amendment would also codify the SEC’s view that voting advice furnished in response to an unsolicited inquiry (e.g., a financial advisor or broker providing voting advice based on an unsolicited inquiry from its client) would not constitute a solicitation. (For more on the SEC’s August 21 guidance, see Goodwin’s September 11, 2019 client alert).
  • Rules 14a-2(b)(1) and 14a-2(b)(3). The proposed amendments would subject proxy advisers currently relying on Rule 14a-2(b)’s exemptions from the information and filing requirements of the proxy rules to certain enhanced disclosures. Proxy advisers would be required to disclose material conflicts of interest in their proxy voting advice. The proposed amendments would also require proxy advisers to provide companies and other soliciting parties an opportunity to review and provide feedback on the proxy adviser’s advice before it is provided to clients. The proposed amendments would also allow companies and other soliciting parties to request that the proxy adviser hyperlink in its proxy voting advice to the company’s or other soliciting party’s written views on the proxy adviser’s advice.
  • Rule 14a-9. The proposed amendments would include new examples of how a proxy adviser’s failure to disclose certain information in its proxy voting advice could be considered misleading within the meaning of the rule.

The public may comment on the proposed amendments until 60 days after publication in the Federal Register.

SEC Announces Proposed Amendments to the Advertising and Cash Solicitation Rules for Investment Advisers

On November 4, the SEC announced that it had voted to propose amendments to the Investment Advisers Act of 1940 rules regarding investment adviser advertisements and payments to solicitors. On the amendments’ purpose, SEC Chairman Jay Clayton stated, “The reforms we have proposed today are designed to address market developments and to improve the quality of information available to investors, enabling them to make more informed choices.” The amendments would revise Rules 206(4)-1, 206(4)-3, and 204-2 and would amend Form ADV. The proposed amendments to Rule 206(4)-1 would, among other things, update the definition of “advertisement” to provide flexibility and remain current with advances in technology and industry practices, permit testimonials and endorsements and third-party ratings, under certain circumstances, and would provide additional protections for advertisements targeted at retail audiences. The proposed amendments to Rule 206(4)-3 are meant to make refinements in its scope pertaining to written solicitation agreements and in disclosure requirements. The solicitation amendments would expand the rule to cover all forms of compensation to solicitors rather than the cash-only rule, subject to a de minimis threshold. Finally, the SEC has also proposed amendments to Rule 204-2 regarding advertising and solicitation rules, as well as to Form ADV, to provide additional information regarding advertising practices, which will facilitate the SEC’s review, inspection and enforcement practices. The public comment period will remain open for 60 days following the proposal’s publication in the Federal Register.

FDIC Requests Comments on Collection of Pilot Program Proposals by Innovators

On November 6, the FDIC requested comments on its collection of pilot program proposals by innovators. An innovation pilot program framework can provide a regulatory environment in which the FDIC, in conjunction with individual proposals collected from innovators, including banks, will provide tailored regulatory and supervisory assistance, when appropriate, to facilitate the testing of innovative and advanced technologies, products, services, systems, or activities. At the end of the comment period, any comments and recommendations received will be reviewed to determine the extent to which the collection of proposals should be modified prior to the submission to the Office of Management and Budget for review and approval. Comments must be submitted by January 6, 2020.


FDIC Settles With Seattle-Based Bank Over Alleged RESPA Violations

On November 6, the FDIC announced a settlement with a Seattle-based bank over alleged violations of the Real Estate Settlement Procedures Act (RESPA). According to the FDIC, the bank, through a now-discontinued business line, entered into certain co-marketing and desk rental arrangements with real estate brokers and home builders to co-market their services using online platforms. The FDIC found that these arrangements resulted in the bank paying fees to the real estate brokers and home builders for referrals of business. Such arrangements may be permissible under certain circumstances, but in this case the FDIC found that the agreements violated RESPA because the amounts paid exceeded the fair market value of the goods and services provided. Read the Enforcement Watch blog post.

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