August 9, 2011

From the ABA Annual Meeting: FINRA Corporate Financing Update

Here’s a briefing, thanks to Suzanne Rothwell: Yesterday, Joseph Price, Senior Vice President, FINRA’s Corporate Financing/Advertising Regulation, briefed the ABA Subcommittee on FINRA Corporate Financing Rules on current rulemaking and matters related to the Corporate Financing Department’s review of public offerings. Joanie Ward, Shayna Richardson, and Bleecker Hawkins from FINRA’s Corporate Financing Department also participated.

Amend Rule 5110 to Address Terminated Offerings

Mr. Price explained that FINRA staff are developing amendments to Rule 5110 that will: (1) delete a provision that permits a broker/dealer to receive “tail fees” in the event of a terminated offering and(2) amend the Rule to allow the underwriting agreement to include provisions providing for liquidated damages and a right of first refusal (ROFR) in the case of terminated offerings on condition that these provisions shall not become effective if an issuer terminates a broker/dealer for cause. Termination for cause would include a failure by the firm to provide customary services.

Mr. Price stated that the staff hoped to present the proposal to the FINRA Board in September for approval of a Regulatory Notice requesting comments. After comments are considered, FINRA will present a final version of the proposal for Board approval that would be filed with the SEC for additional comment and approval.

Proposed Amendment to NASD Rule 2340 re: DPPs and REITs

The FINRA Board recently approved the publication for comment of proposed amendments to the account statement rule (NASD Rule 2340) that would require changes in how valuations are provided on account statements in the case of unlisted DPPs and REITs. Currently, NASD Rule 2340 allows broker/dealers to use the offering price or par value on customer account statements for the duration of the securities offering (which generally are at least four years and sometimes longer using two or more consecutive registration statements) until 18 months after completion of the offering. Thereafter, the issuer must provide an estimated value for broker/dealers to use on the account statements.

Mr. Price advised that the proposal would require that the account statement valuation for the security during the offering must be a net par value that is the offering price minus any front-end fees. This net par value may only be used on account statements during the “initial” offering period covered by the first registration statement. The proposal would also clarify that a broker/dealer that knows that the issuer’s estimated value is unreliable is permitted to refrain from including the issuer’s value on the firm’s customer account statements. Mr. Price stated that broker/dealers are not required to monitor each valuation for validity.

Based on Mr. Price’s explanation of the preparation of the Notice, it appears that the Notice may be published before the end of September.

Proposed Rule 5123: Filing of Private Offerings

Mr. Price advised that SEC staff have provided informal comments on a draft of FINRA’s proposal to adopt new Rule 5123 that would require that FINRA members file private placements with FINRA, unless the offering comes within a filing exemption provided in current FINRA Rule 5122, and that the offering document must disclose the intended use of proceeds and offering expenses (including placement agent compensation). FINRA’s changes to the proposal would:

1. Clarify that refilling of an amended PPM would only be necessary in the case of a “material” amendment to the PPM, such as a major change that requires recirculation or a new offering.

2. Clarify that each firm participating in a private placement will be responsible for filing because different firms may charge different fees and it may be difficult for a firm to confirm that a PPM was previously filed by another firm.

3. Revise the timing of the filing requirement to be no later than 15 days after the date of first sale in order to be consistent with Form D filing with the SEC.

Mr. Price provided an explanation of FINRA’s anticipated review methodology. FINRA appears to be developing sophisticated artificial intelligence technology to identify PPMs that meet a certain risk score, based on numbers of factors. PPMs that display sufficient risk characteristics will be reviewed by FINRA staff. All PPMs filed will also be available to FINRA examiners when they conduct an on-site examination of FINRA members.

Mr. Price explained that if FINRA identifies, for example, an issue related to the issuer’s disclosure of the use of proceeds, FINRA review will focus on the broker/dealer’s satisfaction of its due diligence obligations under FINRA Rule 2210 (the suitability rule) in light of the problematic disclosure. Mr. Price is hoping that FINRA will be able to identify problematic offerings during the offering period in order to better protect investors. In response to a question, Mr. Price explained that FINRA was not proposing to expand any of the filing exemptions in FINRA Rule 5122 despite recommendations for such changes in some of the comment letters FINRA received when it published the original version of the proposal in Regulatory Notice 11-04.

Implementation of the New COBRADesk System

Joanie Ward and Shayna Richardson provided updates on the status of the development of major changes to the COBRADesk system for use by attorneys to submit information on public offerings for review by FINRA staff under FINRA rules. FINRA staff believe that the new system will significantly facilitate the submission and review of offerings. Ms. Ward stated that she anticipated that the new system would be fully implemented by June 2012. She also stated that the COBRADesk explanatory and guidance materials will be posted on the part of the FINRA website that does not require a COBRADesk password so that they are accessible by all members and their attorneys. Ms. Richardson encouraged the attorneys to continue to provide feedback to the staff on ways to improve review procedures and advised that some of the frequent filers will be contacted to test out the new COBRADesk system.

Setting Up Government Meetings

In this podcast, Lisa Noller of Foley & Lardner discusses strategies to set up a meeting with the government, including:

– How hard is it to set up a meeting with the government?
– How do you know whether you have the appropriate people attending from the government?
– Who should you bring to the meeting?
– What should you tell the government at the meeting?
– How important is follow-up after the meeting?

Flying out early on vacation today. Dave will be manning the blog for the next week. Good time to get out of town! Sell, sell, sell…

– Broc Romanek