[Federal Register Volume 86, Number 113 (Tuesday, June 15, 2021)]
[Notices]
[Pages 31764-31769]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-12474]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92133; File No. SR-FINRA-2020-038]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change, as Modified by 
Amendment No. 1, to FINRA Rules 5122 (Private Placements of Securities 
Issued by Members) and 5123 (Private Placements of Securities) That 
Would Require Members To File Retail Communications Concerning Private 
Placement Offerings That Are Subject to Those Rules' Filing 
Requirements

June 9, 2021.

I. Introduction

    On October 28, 2020, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``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 amend FINRA Rules 5122 
(Private Placements of Securities Issued by Members) and 5123 (Private 
Placements of Securities) that would require members to file certain 
retail communications concerning private placements.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    The proposed rule change was published for comment in the Federal 
Register on November 6, 2020.\3\ On December 11, 2020, FINRA consented 
to an extension of 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 February 4, 2021.\4\ On January 12, 2021, FINRA 
responded to five comment letters received in response to the Notice 
and filed an amendment to the proposed rule change (``Amendment No. 
1'').\5\ On January 29, 2021, FINRA responded to a sixth comment letter 
received in response to the Notice.\6\ On February 4, 2021, the 
Commission filed an Order Instituting Proceedings to determine whether 
to approve or disapprove the proposed rule change, as modified by 
Amendment No. 1.\7\ The Commission received no comments in response to 
the OIP. On April 12, 2021, FINRA responded to a seventh comment letter 
received in response to the Notice.\8\ On May 4, 2021, FINRA consented 
to an extension of the time period in which the Commission must approve 
or disapprove the proposed rule change to May 26, 2021.\9\ On May 25, 
2021, FINRA consented to an extension of the time period in which the 
Commission must approve or disapprove the proposed rule change to June 
9, 2021.\10\ This order approves the proposed rule change, as modified 
by Amendment No. 1.
---------------------------------------------------------------------------

    \3\ See Exchange Act Release No. 90302 (Nov. 2, 2020), 85 FR 
71120 (Nov. 6, 2020) (File No. SR-FINRA-2020-038) (``Notice'').
    \4\ See letter from Joseph Savage, Vice President, Office of 
General Counsel Regulatory Policy, FINRA, to Daniel Fisher, Branch 
Chief, Division of Trading and Markets, Commission, dated December 
11, 2020. This letter is available at https://www.finra.org/sites/default/files/2021-01/SR-FINRA-2020-038-Extension1.pdf.
    \5\ See letter from Joseph P. Savage, Vice President and 
Counsel, Office of General Counsel, FINRA, to Vanessa Countryman, 
Secretary, Commission, dated January 12, 2021 (``FINRA January 12 
Letter''). The FINRA January 12 Letter is available at the 
Commission's website at https://www.sec.gov/comments/sr-finra-2020-038/srfinra2020038-8233135-227749.pdf. Amendment No. 1 is available 
at https://www.finra.org/sites/default/files/2021-01/SR-FINRA-2020-038-Amendment1.pdf.
    \6\ See letter from Joseph P. Savage, Vice President and 
Counsel, Office of General Counsel, FINRA, to Vanessa Countryman, 
Secretary, Commission, dated January 29, 2021 (``FINRA January 29 
Letter''). The FINRA January 29 Letter is available at the 
Commission's website at https://www.sec.gov/comments/sr-finra-2020-038/srfinra2020038-8311262-228459.pdf.
    \7\ See Exchange Act Release No. 91066 (Feb. 4, 2021), 86 FR 
8970 (Feb. 10, 2021) (File No. SR-FINRA-2020-038) (``OIP'').
    \8\ See letter from Joseph P. Savage, Vice President and 
Counsel, Office of General Counsel, FINRA, to Vanessa Countryman, 
Secretary, Commission, dated April 12, 2021 (``FINRA April 12 
Letter''). The FINRA April 12 Letter is available at the 
Commission's website at https://www.sec.gov/comments/sr-finra-2020-038/srfinra2020038-8662482-235305.pdf.
    \9\ See letter from Joseph Savage, Vice President, Office of 
General Counsel Regulatory Policy, FINRA, to Daniel Fisher, Branch 
Chief, Division of Trading and Markets, Commission, dated May 4, 
2021. This letter is available at https://www.finra.org/sites/default/files/2021-05/SR-FINRA-2020-038-Extension2.pdf.
    \10\ See letter from Joseph Savage, Vice President, Office of 
General Counsel Regulatory Policy, FINRA, to Daniel Fisher, Branch 
Chief, Division of Trading and Markets, Commission, dated May 25, 
2021. This letter is available at https://www.finra.org/sites/default/files/2021-05/SR-FINRA-2020-038-Extension3.pdf.
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    For certain private placements of unregistered securities issued by 
a FINRA member or a control entity \11\ (``member private 
placements''), FINRA Rule 5122 requires the member or control entity to 
provide prospective

[[Page 31765]]

investors \12\ with a private placement memorandum (``PPM''), term 
sheet or other offering document that discloses the intended use of the 
offering proceeds, the offering expenses, and the amount of selling 
compensation that will be paid to the member and its associated 
persons. Among other things, the current rule also requires a member to 
file the PPM, term sheet or other offering document with FINRA's 
Corporate Financing Department at or prior to the first time the 
document is provided to any prospective investor, and to file any 
amendments to such documents within 10 days of being provided to any 
investor or prospective investor.\13\ Similarly, for certain private 
placements of unregistered securities \14\ issued by a non-member, 
FINRA Rule 5123 requires members or control persons to file with 
FINRA's Corporate Financing Department any PPM, term sheet or other 
offering document,\15\ including any material amended versions thereof, 
used in connection with an offering within 15 calendar days of the date 
of first sale.
---------------------------------------------------------------------------

    \11\ A ``control entity'' means any entity that controls or is 
under common control with a member, or that is controlled by a 
member or its associated persons. See FINRA Rule 5122(a)(2)-(3); see 
also Notice at note 3.
    \12\ Because of the types of private placements exempt from the 
application of Rule 5122, FINRA believes that the rule applies 
predominately to private placements sold to retail investors. See 
Notice at 71121.
    \13\ See Notice at 71120.
    \14\ See Notice at note 8 (listing those types of member private 
placements exempt from the filing obligations of Rule 5122, 
including, among others, offerings sold solely to institutional 
accounts, qualified purchasers, qualified institutional buyers, 
investment companies, and banks).
    \15\ Rules 5122 and 5123 do not enumerate the types of 
information that might be considered ``other offering documents.'' 
However, FINRA has stated previously that an example of ``other 
offering document'' is ``[a]ny other type of document that sets 
forth the terms of the offering.'' See ``Frequently Asked Questions 
(FAQ) About Private Placements,'' Question #10, available on 
www.finra.org. The ``terms of an offering'' include facts such as 
the amount of proceeds that the issuer intends to raise, the type of 
security, descriptions or illustrations of the intended use of 
proceeds, and explanations of tax benefits or other information that 
would be relevant to an investor when deciding whether to make an 
investment. See Notice at 71121.
---------------------------------------------------------------------------

    Separately, FINRA also requires broker-dealers to file with FINRA's 
Advertising Regulation Department certain written communications that 
they distribute or make available to retail customers to review those 
written communications for compliance with the content requirements of 
FINRA Rule 2210 (Communications with the Public).\16\ For example, 
retail communications \17\ are required to comply with the general, 
fair and balanced standards in FINRA Rule 2210.\18\ Despite these 
existing obligations, FINRA has found a comparatively high rate of non-
compliance with Rule 2210 of retail communications concerning private 
placements.\19\ Currently, some broker-dealers submit retail 
communications as part of their Rules 5122 and 5123 filings either 
voluntarily or as new members.\20\ In a 2018 spot check of these 
filings, FINRA found that 76% of retail communications filed during the 
spot check review period involved significant violations of Rule 
2210.\21\ Further, FINRA stated that since January 1, 2014, it has 
initiated 49 disciplinary actions related to non-compliant retail 
communications concerning private placements. This number represents 
21% of all actions involving private placements. According to FINRA, 
these communications often present false or misleading information 
regarding the underlying offering, which could result in significant 
losses to investors and could undermine public trust in the private 
placement markets.\22\
---------------------------------------------------------------------------

    \16\ See FINRA Rule 2210(c) (Filing Requirements and Review 
Procedures).
    \17\ FINRA Rule 2210(a)(5) defines a ``retail communication'' as 
any written (including electronic) communication that is distributed 
or made available to more than 25 retail investors within any 30 
calendar-day period. See Regulatory Notice 20-21 (Jul. 2020) 
(stating that a member firm that assists in the preparation of a PPM 
or other offering document should expect that it will be considered 
a communication with the public by that member firm for purposes of 
Rule 2210); see also FINRA January 12 Letter. FINRA Rule 2210 
generally does not require members to file private placement 
communications. More specifically, there are no filing requirements 
for communications distributed or made available only to 
institutional investors, as defined in Rule 2210(a)(4), or 
communications that are distributed or made available to 25 or fewer 
retail customers within a 30-day period. Moreover, there is no 
product-specific filing requirement for retail communications 
concerning private placements in FINRA Rule 2210(c)(1) through (4)), 
as those requirements apply only to retail communications concerning 
specified registered securities, such as mutual funds or variable 
products. Under FINRA Rule 2210(c)(1)(A), during the first year 
after a member's registration is declared effective, the member must 
file at least 10 business days prior to use any widely disseminated 
retail communication (e.g., newspaper, television, or radio 
advertisements and publicly available websites). However, FINRA Rule 
2210(c)(7) excludes specified retail communications from the filing 
requirements, including retail communications that were previously 
filed with FINRA's Advertising Regulation Department and used 
without material change ((c)(7)(A)); that do not make any financial 
or investment recommendation or otherwise promote a product or 
service of the member ((c)(7)(C)); or that are ``offering 
documents'' similar to prospectuses (such as PPMs) concerning 
securities that are exempt from registration ((c)(7)(F)).
    \18\ All member communications must be based on principles of 
fair dealing and good faith, must be fair and balanced, and must 
provide a sound basis for evaluating the facts in regard to any 
particular security or type of security, industry, or service. See 
FINRA Rule 2210(d)(1)(A).
    \19\ See Notice at 71122.
    \20\ See Notice at 71223 (stating that members submit retail 
communications as part of their Rule 5122 and 5123 private placement 
filings while some others submit them through FINRA's Advertising 
Regulation Department's filings review program under Rule 2210 
either voluntarily or as new members) and at note 12 (citing FINRA 
Rule 2210(c)(1)(A) requiring new members to file all widely-
distributed retail communications (such as publicly available 
websites) that promote products or services of the firm during the 
first year after the member's broker-dealer membership with FINRA's 
Advertising Regulation Department is declared effective).
    \21\ See Notice at 71122 (stating that the violations included 
retail communications that: contained prohibited projections or 
unreasonable forecasts; failed to provide a sound basis to evaluate 
the facts with respect to the offering; failed to adequately 
disclose the general risks associated with private placement 
investments; or contained readily apparent false or misleading 
statements or claims).
    \22\ See id.
---------------------------------------------------------------------------

    To address this area of regulatory concern, FINRA proposed 
amendments to Rules 5122 and 5123 that would require members or control 
persons to file retail communications that ``promote or recommend'' a 
private placement with FINRA's Corporate Financing Department, in 
addition to the currently required PPMs, term sheets, and other 
offering documents.\23\ The rules' requirements that material 
amendments to offering documents must be filed also would apply to any 
material amendments to retail communications concerning private 
placements.\24\ The proposed rule change would provide FINRA with a 
more timely opportunity to review retail communications concerning 
private placements for compliance with its rules. Other than those 
documents filed pursuant to Rule 2210, FINRA's review of such documents 
is currently limited to its cycle and spot exams of its members.\25\
---------------------------------------------------------------------------

    \23\ Amendment 1 to the proposed rule change clarified that 
members or control persons would be required to file any retail 
communication that ``promotes or recommends'' a private placement, 
rather than any retail communication that ``concerns'' a private 
placement, as originally proposed.
    \24\ See Notice at 71122.
    \25\ See id.
---------------------------------------------------------------------------

    The proposed rule change would not, however, broaden the 
application of the rules to capture those offerings that are currently 
exempt from filing.\26\ The proposed rule change also would not impose 
new filing fees on broker-dealers.\27\
---------------------------------------------------------------------------

    \26\ See e.g., supra note 14.
    \27\ See Notice at 71122 and note 21.
---------------------------------------------------------------------------

    In addition, the proposed rule change would neither amend Rule 2210 
nor, as FINRA states, alter FINRA's interpretation of the application 
of that rule's requirements.\28\ Thus, if written communications 
qualify as retail communications pursuant to FINRA Rule 2210, those 
retail communications

[[Page 31766]]

would be subject to the proposed rule changes.
---------------------------------------------------------------------------

    \28\ See FINRA January 12 Letter, FINRA January 29 Letter, and 
FINRA April 12 Letter.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

A. Discussion

    After careful review of the proposed rule change, as modified by 
Amendment No. 1, the comment letters, and FINRA's responses to the 
comments, the Commission finds that the proposed rule change, as 
modified by Amendment No. 1, is consistent with the requirements of the 
Exchange Act and the rules and regulations thereunder that are 
applicable to a national securities association.\29\ Specifically, the 
Commission finds that the proposed rule change, as modified by 
Amendment No. 1, is consistent with Section 15A(b)(6) of the Exchange 
Act,\30\ which requires, among other things, that FINRA rules 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.
---------------------------------------------------------------------------

    \29\ In approving this rule change, the Commission has 
considered the rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \30\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    Four commenters supported the proposed rule change.\31\ Two of 
these commenters stated that the proposed rule change would establish 
necessary investor protections in light of regulatory changes that have 
expanded the marketplace for private placements.\32\ Specifically, one 
stated that its state securities administrator members have observed 
significant, recurring problems with private placements and that, 
``[w]ith the SEC's recent regulatory changes to the private [placement] 
marketplace, . . . the need for increased regulatory scrutiny of 
private placement advertisements is even more acute.'' \33\ One other 
supportive commenter stated that, because the number of persons who can 
invest in private placements has increased substantially over the last 
several decades, ``FINRA must keep an eye [on] private placement sales 
abuses.'' \34\ One of the other supportive commenters stated that FINRA 
and Commission rules already require members to keep detailed records 
on marketing materials, which are routinely requested during cycle 
examinations, and that the proposed rule changes could facilitate this 
review process.\35\ The fourth supportive commenter stated that the 
proposed rule changes are justified because they would help FINRA 
``better ensure that retail communications used by broker-dealers in 
retail private placements are fair, balanced and not misleading.'' \36\
---------------------------------------------------------------------------

    \31\ See letter from David P. Meyer, President, Public Investors 
Advocate Bar Association, to Vanessa Countryman, Secretary, 
Commission, dated November 27, 2020 (``PIABA Letter''); letter from 
Lisa Hopkins President, General Counsel and Senior Deputy, North 
American Securities Administrators Association, Inc., to J. Matthew 
DeLesDernier, Assistant Secretary, Commission, dated November 24, 
2020 (``NASAA Letter''); letter from James P. Dowd, North Capital 
Private Securities Corp. and Public Brokers, LLC, to Secretary, 
Commission, dated November 23, 2020 (``NCPSC Letter''); and letter 
from Tom Selman, Founder, Scopus Financial Group, to Vanessa 
Countryman, Secretary, Commission, dated November 22, 2020 (``Scopus 
Letter'').
    \32\ See NASAA Letter and PIABA Letter.
    \33\ NASAA Letter (citing Securities Act Release No. 10824 (Aug. 
6, 2020) (File No. S7-25-19) (updating the definition of 
``accredited investor'' to identify more effectively investors that 
have sufficient knowledge and expertise to participate in investment 
opportunities that do not have the rigorous disclosure and 
procedural requirements, and related investor protections, provided 
by registration under the Securities Act of 1933); and Securities 
Act Release No. 10884 (Nov. 2. 2020) (File No. S7-05-20) (improving 
certain aspects of the exempt offering framework to promote capital 
formation while preserving or enhancing important investor 
protections)).
    \34\ PIABA Letter (noting a rise in the percentage of American 
households qualified as ``accredited investors'' since the 
Commission first established the qualification standards in 1982).
    \35\ See NCPSC Letter (referencing FINRA Rule 2210(b)(4)).
    \36\ Scopus Letter. Communications with the public are subject 
to FINRA Rule 2210's content standards, including its requirements 
that communications be fair and balanced and not misleading. See 
FINRA January 12 Letter.
---------------------------------------------------------------------------

1. Requests for Guidance Under FINRA Rule 2210 (Communications With the 
Public)
a. Issuer-Prepared Material
    A supportive commenter requested that the Commission use this 
opportunity to provide ``definitive guidance'' to members with respect 
to the applicability of Rule 2210 to materials prepared and 
disseminated by an issuer to the public, without the involvement of a 
member firm or its registered representatives.\37\ In response, FINRA 
stated that it has already addressed the applicability of Rule 2210 to 
issuer-prepared communications.\38\ In particular, FINRA has previously 
stated that ``[a member] that assists in the preparation of a private 
placement memorandum or other offering document should expect that it 
will be considered a communication with the public by that [member] for 
purposes of . . . Rule 2210, FINRA's advertising rule.'' \39\ 
Similarly, FINRA has stated that sales literature concerning a private 
placement that a member distributes will be deemed to constitute a 
communication by that member with the public, whether or not the member 
assisted in its preparation.\40\ Therefore, regardless of whether a 
member distributes a retail communication that is attached to a PPM or 
as a standalone document, it constitutes a member communication subject 
to Rule 2210.\41\
---------------------------------------------------------------------------

    \37\ See NCPSC Letter.
    \38\ FINRA January 12 Letter.
    \39\ Id. (citing Regulatory Notice 20-21 (Jul. 2020) (quoting 
Regulatory Notice 10-22 (Apr. 2010))).
    \40\ See id.; see also Regulatory Notice 12-29 (Jun. 2012) 
(stating that effective February 4, 2013, communications previously 
defined as ``sales literature'' under NASD Rule 2210 (Communications 
with the Public) fell within the definition of ``retail 
communication'' in FINRA Rule 2210).
    \41\ See FINRA January 12 Letter.
---------------------------------------------------------------------------

    FINRA's proposed rule change does not amend the definition of 
``retail communications'' or change the scope of communications 
captured within the definition of the term. Thus, the Commission 
believes that interpretations of the definition of ``retail 
communications'' are outside the scope of the proposed rule change. 
However, FINRA stated that it has issued guidance on retail 
communications concerning private placements, stating that, in general, 
if a member distributes sales literature concerning a private placement 
it will be deemed a communication by that member with the public 
subject to Rule 2210.\42\ In addition, Rule 2210 prohibits members from 
publishing, circulating, or distributing ``any communication that the 
member knows or has reason to know contains any untrue statement of a 
material fact or is otherwise false or misleading'' regardless of its 
origin.\43\
---------------------------------------------------------------------------

    \42\ See supra note 38-41 and accompanying text.
    \43\ FINRA Rule 2210(d)(1)(B); see also FINRA January 12 Letter.
---------------------------------------------------------------------------

b. Performance Projections
    Three commenters sought guidance regarding the application of FINRA 
Rule 2210 to performance projections.\44\ A supportive commenter 
requested that the Commission provide interpretive guidance under 
Exchange Act Rule 10b-5 \45\ concerning the inclusion of

[[Page 31767]]

performance return objectives in private placement sales materials.\46\ 
Specifically, the commenter believes that because of Rule 2210's 
restrictions on predicting or projecting performance,\47\ broker-
dealers are placed at a competitive disadvantage relative to private 
placements that do not involve a broker-dealer (to which Rule 2010 
would not apply), and that the Commission should ``level the playing 
field.'' \48\
---------------------------------------------------------------------------

    \44\ See NCPSC Letter; letter from Anthony Chereso, President 
and CEO, Institute for Portfolio Alternatives, to Vanessa 
Countryman, Division of Investment Management [sic], Commission, 
dated January 26, 2021 (``IPA Letter''); and letter from Mick Law 
P.C., L.L.O. to Vanessa Countryman, Division of Investment 
Management [sic], Commission, dated February 2, 2021 (``Mick 
Letter'').
    \45\ Under Exchange Act Rule 10b-5, it is unlawful for any 
person, directly or indirectly, by the use of any means or 
instrumentality of interstate commerce, or of the mails or of any 
facility of any national securities exchange, to employ any device, 
scheme, or artifice to defraud, to make any untrue statement of a 
material fact or to omit to state a material fact necessary in order 
to make the statements made, in the light of the circumstances under 
which they were made, not misleading, or to engage in any act, 
practice, or course of business which operates or would operate as a 
fraud or deceit upon any person, in connection with the purchase or 
sale of any security.
    \46\ See NCPSC Letter.
    \47\ See FINRA Rule 2210(d)(1)(F) (stating that, in general, 
communications may not predict or project performance, imply that 
past performance will recur or make any exaggerated or unwarranted 
claim, opinion or forecast).
    \48\ See id.
---------------------------------------------------------------------------

    In response, FINRA stated that, in general, Rule 2210(d)(1)(F) 
prohibits member communications from predicting or projecting 
performance or making any exaggerated or unwarranted claim, opinion or 
forecast.\49\ More specifically, FINRA stated that retail 
communications concerning private placements may not project or predict 
returns to investors such as yields, income, dividends, capital 
appreciation percentages or any other future investment 
performance.\50\ However, FINRA also clarified that despite its 
prohibition on certain types of performance predictions, its rules 
permit retail communications concerning private placements to include 
reasonable forecasts of issuer operating metrics (e.g., forecasted 
sales, revenues or customer acquisition numbers) that may convey 
important information regarding the issuer's plans and financial 
position. FINRA stated that these presentations should provide a sound 
basis for evaluating the facts, such as clear explanations of the key 
assumptions underlying the forecasted issuer operating metrics and the 
key risks that may impede achievement of the forecasted metrics.\51\
---------------------------------------------------------------------------

    \49\ See FINRA January 12 Letter.
    \50\ See id. (citing Regulatory Notice 20-21 (Jul. 2020)).
    \51\ See id.
---------------------------------------------------------------------------

    One commenter recommended that FINRA ``clarify the application of 
its principles-based advertising rules to retail communications 
concerning private placement[s].'' \52\ In particular, the commenter 
recommended that FINRA provide interpretive guidance on the term 
``performance projection'' to help members comply with FINRA Rule 
2210(d)(1)(F).\53\ FINRA responded that the proposed rule change would 
not amend or provide guidance on Rule 2210. Accordingly, FINRA believes 
that the commenter's recommendation is outside the scope of the 
proposed rule change.\54\
---------------------------------------------------------------------------

    \52\ IPA Letter.
    \53\ See id.
    \54\ See FINRA January 29 Letter.
---------------------------------------------------------------------------

    Another commenter described its experience evaluating the features 
and risks of alternative investments marketed through private 
placements and has found, like FINRA, many instances in which a 
sponsor's offering promotional materials did not comply with FINRA Rule 
2210.\55\ Thus, the commenter asked FINRA to further clarify Regulatory 
Notice 20-21 to: (1) Explain what types of information constitute an 
issuer's ``operating metrics'' \56\ and (2) clarify when members may 
present information about ``distribution rates'' within retail 
communications.\57\
---------------------------------------------------------------------------

    \55\ See Mick Letter.
    \56\ See id.
    \57\ See id.
---------------------------------------------------------------------------

    In response, FINRA stated that the commenter's concerns regard the 
application of FINRA Rule 2210 rather than the filing requirements in 
the proposed rule changes to Rules 5122 and 5123 that are the subject 
of the rule filing.\58\ FINRA reiterated its guidance under Regulatory 
Notice 20-21 but stated that it is willing to further discuss with its 
members issues regarding particular retail communications that are 
filed with FINRA, both before and after a communication is filed.\59\
---------------------------------------------------------------------------

    \58\ See FINRA April 12 Letter.
    \59\ See id.
---------------------------------------------------------------------------

    Given that the proposed rule change does not change the 
interpretation of retail communications, the Commission believes that 
interpretations of the definition of ``retail communications'' are 
outside the scope of the proposed rule change. However, FINRA stated 
that it has existing guidance regarding the type of performance 
projections a member can include, and is prohibited from including, in 
its retail communications.
2. Other Suggested Rule Changes
    One of the four commenters supporting the proposed rule change 
suggested three additional changes ``to protect retail investors in the 
private placement market.'' \60\ First, the commenter recommended that 
FINRA combine Rules 5122 and 5123 into a single rule and that the 
combined new rule should require (as does Rule 5122) disclosure about 
the use of offering proceeds, offering expenses and selling 
compensation, suggesting that providing investors these key pieces of 
information about an offering is justified given the history of 
problems in the private placement market. Third, the commenter 
recommended that FINRA amend Rule 2210 so that it applies to PPMs, term 
sheets, and other offering documents in retail private placements, 
arguing that in the absence of a legal definition of ``private 
placement memorandum'' it is difficult to distinguish a PPM from other 
retail communications and it may be difficult to determine if a member 
assisted in its preparation. Accordingly, the commenter recommended 
that such offering documents be subject to the general content 
standards of Rule 2210(d)(1).\61\
---------------------------------------------------------------------------

    \60\ Scopus Letter.
    \61\ See id.
---------------------------------------------------------------------------

    In response, FINRA stated that the commenter's suggestions were 
beyond the scope of the proposed rule change and could not be adopted 
as part of this filing.\62\ The Commission agrees with FINRA that the 
commenter's suggestions raise issues that go beyond the subject matter 
of this proposal and therefore are beyond the scope of the proposed 
rule change.
---------------------------------------------------------------------------

    \62\ See FINRA January 12 Letter.
---------------------------------------------------------------------------

3. Non-Promotional Communications
    One commenter expressed concern with the breadth of the 
communications that would be required to be filed.\63\ The commenter 
believes that requiring a member to file all ``retail communications 
concerning a private placement'' could result in members being required 
to file communications that are administrative in nature, such as 
confirmations that a signature was received or reminders of actions 
that investors still need to take.\64\ Instead, the commenter 
recommended that FINRA narrow the scope of the filing requirement to 
capture only ``those types of communications on which investors are 
likely to base an investment decision,'' such as pitch decks or slide 
shows.\65\
---------------------------------------------------------------------------

    \63\ See letter from Atish Davda, Co-Founder and Chief Executive 
Office, Chris Giampapa, General Counsel, and Phil Haslett, Co-
Founder and Chief Revenue Officer, EquityZen Inc., to Vanessa A. 
Countryman, Secretary, Commission, dated December 4, 2020.
    \64\ See id.
    \65\ See id.
---------------------------------------------------------------------------

    In response, FINRA noted that the examples of administrative 
communications that the commenter identified likely would be directed 
to a single or small group of investors, and thus would be 
correspondence (which is not subject to filing) rather than retail

[[Page 31768]]

communications.\66\ Nevertheless, FINRA recognized that some of these 
administrative and non-promotional communications may fall within the 
definition of retail communication because they are distributed to more 
than 25 retail investors within a 30-day period.\67\ Accordingly, FINRA 
amended the proposed rule change to narrow the filing requirement to 
any retail communication that ``promotes or recommends'' a member 
private placement (Rule 5122) or other private placement (Rule 5123), 
rather than a retail communication ``concerning'' such offerings.\68\
---------------------------------------------------------------------------

    \66\ See FINRA January 12 Letter. ``Correspondence'' is defined 
as any written (including electronic) communication that is 
distributed or made available to 25 or fewer retail investors within 
any 30 calendar-day period. See Rule 2210(a)(2).
    \67\ See supra note 17.
    \68\ See FINRA January 12 Letter; see also supra note 5.
---------------------------------------------------------------------------

    The Commission believes that the proposed rule change in Amendment 
No. 1 to apply the filing requirement only to a retail communication 
that ``promotes or recommends'' a member private placement is designed 
to protect investors and the public interest by appropriately narrowing 
the filing requirement to those communications that pose the greatest 
regulatory concern, and therefore improving the timeliness of FINRA's 
review of private placement communications that might influence 
investors' transaction decisions.

B. Commission Findings

    Under Rules 5122 and 5123, broker-dealers are required to file with 
FINRA's Corporate Financing Department any PPM, term sheet, or other 
offering document used in connection with private placements, but these 
rules do not currently require retail communications governed by Rule 
2210 to be filed. Similarly, Rule 2210 generally does not require 
broker-dealers to file with FINRA's Advertising Regulation Department 
the materials they use to communicate with retail investors concerning 
private placements. Accordingly, firms currently have no regulatory 
obligation to submit retail communications concerning private 
placements for review by FINRA. Currently, some broker-dealers submit 
retail communications as part of their Rules 5122 and 5123 filings 
either voluntarily or as new members.\69\ Given the comparatively high 
rate of non-compliance with Rule 2210 in these private placement retail 
communications, and the increased risk of investor harm associated with 
those communications,\70\ FINRA proposed to amend Rules 5122 and 5123 
to make such submissions mandatory, in addition to the currently 
required PPMs, term sheets, and other offering documents.\71\ The 
proposed rule change would not amend Rule 2210 or change FINRA's 
interpretations of the rule.
---------------------------------------------------------------------------

    \69\ See supra note 20.
    \70\ See supra note 19-22 and accompanying text.
    \71\ See id.
---------------------------------------------------------------------------

    The Commission believes that the proposed rule change to require 
members to file retail communications concerning private placements 
would help prevent fraudulent and manipulative acts and practices by 
facilitating FINRA's review of information about private placements 
being disclosed to retail customers in those communications. Requiring 
members to file retail communications concerning private placements 
with FINRA's Corporate Financing Department would allow FINRA to review 
the documents more efficiently and timely than it could by relying on 
cycle reviews of its members. Through its reviews of the these retail 
communications, FINRA would be able to more efficiently identify retail 
communications about private placements that may not be fair and 
balanced as required by FINRA Rule 2210, thereby reducing the potential 
risk of customer harm from investing on the basis of misleading 
communications. Moreover, given the high rate of non-compliance with 
this fundamental communications standard, FINRA's increased ability to 
review retail communications concerning private placements pursuant to 
this proposed rule change would likely incentivize broker-dealers to 
distribute those types of retail communications that are fair and 
balanced in compliance with Rule 2210 and deter them from presenting 
information in a manner that may cause investor harm. The Commission 
believes that these changes are particularly important in light of the 
expanded retail investor participation in the market for private 
placements.\72\ The proposed rule change would help encourage the use 
of fair and balanced communications to investors making investment 
decisions.
---------------------------------------------------------------------------

    \72\ See supra notes 32-34 and accompanying text.
---------------------------------------------------------------------------

    Although some commenters requested clarification of specific 
aspects of the application of FINRA Rule 2210, such as broker-dealers' 
use of performance projections in their retail communications, and in 
some cases sought guidance on specific factual scenarios, FINRA has 
previously provided guidance on these issues and has offered to 
continue to provide guidance as necessary. Moreover, the Commission 
believes that these comments are beyond the scope of this proposed rule 
change.\73\ Notably, the proposed rule change does not modify Rule 
2210, does not change its application, nor does it subject any 
additional communications to 2210's requirements.\74\
---------------------------------------------------------------------------

    \73\ Another commenter requested that the Commission require 
issuers of new Regulation D offerings to disclose, at a minimum, the 
use of offering proceeds and the offering expenses associated with 
the offering, and that they be filed for review. See Scopus Letter. 
The Commission believes that interpretations of its own regulatory 
terms are beyond the scope of the proposed rule change.
    \74\ A commenter also requested that FINRA combine Rules 5122 
and 5123 into a single rule requiring (as does Rule 5122) disclosure 
about the use of offering proceeds, offering expenses and selling 
compensation. The Commission finds that this suggestion is also 
beyond the scope of the proposed rule change.
---------------------------------------------------------------------------

    In sum, the Commission believes that the proposed rule change 
addresses a problem identified by FINRA regarding the comparatively 
high rate of non-compliance with Rule 2210 of retail communications 
concerning private placements. The Commission believes that FINRA's 
proposed rule change would improve the quality of information available 
to retail investors about private placement securities offered by FINRA 
members and strengthen FINRA's ability to monitor these communications 
for potential violations of its rules thereby improving prospective 
investors' confidence in these communications. FINRA has taken a number 
of steps to narrowly tailor this proposed rule change in some key 
respects: The proposed rule change would apply to types of retail 
communications that have been found to have a high rate of 
noncompliance with FINRA's fair and balanced standards; broker-dealers 
would not have to pay a filing fee for their submissions; and the 
proposed filing requirement has been narrowed to apply only to retail 
communications concerning private placements that ``promote or 
recommend'' a private placement security. Thus, for the reasons stated 
above, we believe that the proposed rule change, as modified by 
Amendment No. 1, is consistent with the provisions of Section 15A(b)(6) 
of the Exchange Act because it is 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.

[[Page 31769]]

IV. Conclusion

    It is therefore ordered pursuant to Section 19(b)(2) of the 
Exchange Act \75\ that the proposed rule change (SR-FINRA-2020-038), as 
modified by Amendment No. 1, be, and hereby is, approved.
---------------------------------------------------------------------------

    \75\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\76\
---------------------------------------------------------------------------

    \76\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------


J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-12474 Filed 6-14-21; 8:45 am]
BILLING CODE 8011-01-P