From Suzanne Rothwell: A few weeks ago, FINRA published Regulatory Notice 11-41 warning broker-dealers that their regulator will closely scrutinize the research issued by an underwriter for compliance with FINRA and SEC research analyst regulations when an issuer has made advance public statements explicitly or implicitly indicating that participation in the issuer’s anticipated public offering is conditioned on the broker providing favorable research.
Although FINRA recognizes that “such uninvited pronouncements place prospective offering participants in a challenging situation,” FINRA nonetheless warns that “even tacit acquiescence to such overtures to be a violation of NASD Rule 2711(e),” the FINRA rule prohibiting brokers from promising favorable research to a company as an inducement or consideration for receiving business. Such acquiescence may also violate NASD Rule 2711(c)(4), which prohibits brokers from soliciting investment banking business, and the SEC’s research analyst certification.
The specific situation of such an issuer’s statements discussed in the FINRA Notice related to a recent WSJ article that reported that AIG “Chief Executive Robert Benmosche has complained to senior executives at investment banks about the unfavorable stock research . . .” and quoted Mr. Benmosche as saying: “For the next offering, I want to make sure there is a clear understanding of who AIG is and our trajectory, and why AIG is a stock that investors should own.”
Are there other areas where an issuer’s demands could lead to regulatory problems for their underwriters? Yes. When an issuer conditions a broker/dealer’s participation in its underwriting on a pre-offering purchase of the issuer’s unregistered securities, FINRA Rule 5110 will generally treat such purchases within 180 days prior to the issuer filing its offering with the SEC as additional underwriting compensation (valued on the difference between the purchase price and the offering price) and the securities will be locked-up for 180 days following the issuer’s offering.
At times, the value of the securities does not, when added to the discount and other compensation, make the arrangement unreasonable under FINRA underwriting compensation limits – but at times it does. If the compensation is unreasonable, sometimes the only solution is for the purchasing broker/dealer to withdraw from the underwriting. Not a good result. These situations can generally be avoided by the underwriter’s counsel reviewing the proposed pre-offering purchase and ensuring that the arrangement would not create later problems.
House Bill Seeks to Relieve Smaller Companies of Internal Controls Obligations
As noted in this Cooley alert, a new House bill introduced by Rep Benjamin Quayle (R-AZ) – “Startup Expansion and Investment Act” – would make internal control reporting and assessment requirements of SOX 404 optional for “smaller” companies. Have I lost count of many bills before this seeking the same thing or was that just a dream?
Congress wants smaller companies to go public more frequently. Congress wants smaller companies to not have strong financial controls. Congress wants investors to lose their money…
RSUs Don’t Constitute a Separate Class for Purposes of Section 12(g)
A few weeks ago, Corp Fin granted no-action relief to Twitter – allowing the company to treat restricted stock units as a separate class for Section 12(g) purposes. The Staff has taken the position that options aren’t counted either for Section 12(g) purposes for some time, going way back to ’01 – and this RSU position has been taken since this Facebook response in ’08.
- Broc Romanek