Document ID: SEC-2020-1773-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2020-11-06T05:00Z

[Federal Register Volume 85, Number 216 (Friday, November 6, 2020)]
[Notices]
[Pages 71120-71125]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-24629]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90302; File No. SR-FINRA-2020-038]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Amendments 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

November 2, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 28, 2020, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend 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.
    The text of the proposed rule change is available on FINRA's 
website at http://www.finra.org, at the principal office of FINRA and 
at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
FINRA Rules 5122 and 5123
    Rule 5122 applies to private placements of unregistered securities 
issued by a member or a control entity \3\ (``member private 
offerings''). The rule requires the member or control entity to provide 
prospective investors 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.
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    \3\ 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). Control 
means beneficial interest, as defined in FINRA Rule 5130(i)(1), of 
more than 50 percent of the outstanding voting shares of a 
corporation, or the right to more than 50 percent of the 
distributable profits or losses of a partnership or other non-
corporate legal entity. Control is determined immediately after the 
closing of an offering, and in the case of an offering with multiple 
intended closings, immediately following each closing. See FINRA 
Rule 5122(a)(3).
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    The rule also requires a member to file the PPM, term sheet or 
other offering document with the FINRA Corporate Financing Department 
(``Corp Fin'') at or prior to the first time the document is provided 
to any prospective investor.\4\ Many member private offerings are 
exempt from the rule's requirements, including among others, offerings 
sold only to institutional accounts, as defined in FINRA Rule 
4512(c),\5\ qualified purchasers, as defined in the Investment Company 
Act of 1940,\6\ and qualified institutional buyers,\7\ as defined in 
Rule 144A under the Securities Act of 1933 (``Securities Act'').\8\
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    \4\ Rule 5122 also requires the filing of any amendments to such 
documents within 10 days of being provided to any investor or 
prospective investor. See FINRA Rule 5122(b)(2).
    \5\ Rule 4512(c) defines ``institutional account'' as the 
account of:
    (1) A bank, savings and loan association, insurance company or 
registered investment company;
    (2) an investment adviser registered either with the SEC under 
Section 203 of the Investment Advisers Act or with a state 
securities commission (or any agency or office performing like 
functions); or
    (3) any other person (whether a natural person, corporation, 
partnership, trust or otherwise) with total assets of at least $50 
million.
    \6\ See 15 U.S.C. 80a-2(a)(51).
    \7\ See 17 CFR 230.144A(a)(1).
    \8\ Rule 5122 exempts the following member private offerings:
    (1) Offerings sold solely to:
    (A) Institutional accounts, as defined in Rule 4512(c);
    (B) qualified purchasers, as defined in Section 2(a)(51)(A) of 
the Investment Company Act;
    (C) qualified institutional buyers, as defined in Securities Act 
Rule 144A;
    (D) investment companies, as defined in Section 3 of the 
Investment Company Act;
    (E) an entity composed exclusively of qualified institutional 
buyers, as defined in Securities Act Rule 144A; and
    (F) banks, as defined in Section 3(a)(2) of the Securities Act;
    (2) offerings of exempted securities, as defined in Section 
3(a)(12) of the Exchange Act;
    (3) offerings made pursuant to Securities Act Rule 144A or 
Regulation S;
    (4) offerings in which a member acts primarily in a wholesaling 
capacity (i.e., it intends, as evidenced by a selling agreement, to 
sell through its affiliate broker-dealers, less than 20% of the 
securities in the offering);
    (5) offerings of exempt securities with short term maturities 
under Section 3(a)(3) of the Securities Act;
    (6) offerings of subordinated loans under Exchange Act Rule 
15c3-1, Appendix D (see NASD Notice to Members 02-32 (June 2002));
    (7) offerings of ``variable contracts'', as defined in FINRA 
Rule 2320(b);
    (8) offerings of modified guaranteed annuity contracts and 
modified guaranteed life insurance policies, as referenced in FINRA 
Rule 5110(h)(2)(D);
    (9) offerings of unregistered investment grade rated debt and 
preferred securities;
    (10) offerings to employees and affiliates of the issuer or its 
control entities;
    (11) offerings of securities issued in conversions, stock splits 
and restructuring transactions that are executed by an already 
existing investor without the need for additional consideration or 
investments on the part of the investor;
    (12) offerings of securities of a commodity pool operated by a 
commodity pool operator, as defined under Section 1a(5) of the 
Commodity Exchange Act;
    (13) offerings of equity and credit derivatives, including OTC 
options; provided that the derivative is not based principally on 
the member or any of its control entities; and
    (14) offerings filed with Corp Fin under FINRA Rules 2310, 5110 
or Rule 5121.

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[[Page 71121]]

    Rule 5123 requires members to file with FINRA any PPM, term sheet 
or other offering document, including any material amended versions 
thereof, used in connection with a private placement of securities 
within 15 calendar days of the date of first sale. Rule 5123 exempts 
private placements that are filed under other FINRA Corporate Financing 
Rules, as well as most of the same categories of private placements 
that are exempt from filing under Rule 5122.\9\ As a result of these 
exemptions, both rules apply predominately to private placements sold 
to retail investors.
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    \9\ See FINRA Rule 5123(b); see also note 8, supra. In addition 
to the exemptions contained in Rule 5122, Rule 5123(b) exempts 
offerings sold by the member or person associated with the member to 
(a) employees and affiliates, as defined in Rule 5121, of the 
issuer; (b) knowledgeable employees as defined in Investment Company 
Act Rule 3c-5; (c) eligible contract participants, as defined in 
Section 3(a)(65) of the Exchange Act; and (d) accredited investors 
described in Securities Act Rule 501(a)(1), (2), (3), and (7); and 
exempts business combination transactions as defined in Securities 
Act Rule 165(f), and standardized options as defined in Securities 
Act Rule 238.
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    FINRA received 2,509 unique Rule 5122 and 5123 filings in 2019. 
FINRA uses analytics to conduct a risk-based review for each filing. 
This analysis of an offering's risk to investors and its ability to 
identify potential rule violations and other potential problems begins 
with the information and documents submitted. Members that sell private 
placements may use a PPM or term sheet alone, or may use a variety of 
other offering documents in addition to, or instead of, a PPM or term 
sheet.
    Because members use a wide variety of materials, Rules 5122 and 
5123 do not enumerate the types of information that might be considered 
``offering documents.'' 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.'' \10\ 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.
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    \10\ See ``Frequently Asked Questions (FAQ) About Private 
Placements,'' Question #10, available on www.finra.org.
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    While Rules 5122 and 5123 do not require retail communications 
governed by Rule 2210 (Communications with the Public) to be filed, 
many members file these communications with their required 
documents.\11\ Examples of these retail communications can include web 
pages that promote the offering, slide presentations, pitch decks, one-
page ``teasers,'' fact sheets, sales brochures, executive summaries, 
and investor packets. Corp Fin often forwards these retail 
communications to FINRA's Advertising Regulation Department (``AdReg'') 
for review.
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    \11\ See Regulatory Notice 09-27 (May 2009), which announced SEC 
approval of Rule 5122, stated that the rule imposes no additional 
requirements regarding the filing of advertisements or sales 
materials. However, as noted, many firms do in fact file retail 
communications concerning private placements under Rules 5122 and 
5123.
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    Corp Fin staff triages the filings it receives under Rules 5122 and 
5123 using a variety of criteria and selects a subset for further 
analysis and review based on the relative risk of the offering. In some 
cases, FINRA opens investigations of particular offerings, which may 
lead to follow-up examinations by Member Supervision staff, and 
potentially, referrals to the Department of Enforcement.
Advertising Regulation Review of Private Placement Retail 
Communications
    In addition to reviewing private placement retail communications 
that are filed under Rules 5122 and 5123 and referred by Corp Fin, 
AdReg reviews private placement retail communications that it receives 
through one of four other channels: (i) New member and voluntary 
filings with AdReg; (ii) referrals from the Member Supervision 
examination program and other surveillance groups; (iii) AdReg spot 
checks; and (iv) assistance in Enforcement cases.
    AdReg has observed that retail communications that have been 
directly filed by new members \12\ or voluntarily with AdReg for 
private placements raise more compliance issues than those for other 
products. Between January 1, 2017, and March 31, 2020, AdReg reviewed 
1,726 new member and voluntary filings of private placement retail 
communications. Of these filings, 41% required revisions to comply with 
applicable standards, and 4% were so noncompliant with the rules that 
FINRA issued ``do not use'' (DNU) review letters. In comparison, during 
this same period, only 8% of overall AdReg filings reviewed required 
revisions, and only 0.1% received a DNU letter.\13\
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    \12\ Rule 2210(c)(1)(A) requires 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 is 
declared effective.
    \13\ During the same period, AdReg analyzed 1,328 private 
placement retail communications that were referred from Corp Fin, 
Member Supervision, or other FINRA departments. Seventy-one percent 
(71%) of these communications required revisions to comply with 
applicable standards and 13% resulted in a DNU letter. In contrast, 
66% of all communications referred by other FINRA staff were 
determined to require revisions and 4% resulted in a DNU letter.
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    In 2018, AdReg conducted a spot check of the private placement 
retail communications provided to Corp Fin in connection with filings 
under Rules 5122 and 5123 during the second and third quarters of 2018. 
The review revealed significant and pervasive violations of Rule 2210; 
overall, 806 of the 1,062 retail communications reviewed (76%) did not 
comply with Rule 2210.
    The most common violation was the inclusion of prohibited 
projections of performance or unreasonable forecasts, e.g., ``Return 4-
6x invested capital net of fees'' and ``Management projects a $100 
million revenue stream can be built in 5 years.'' Numerous others 
contained false or misleading statements, e.g., ``Safety of Principle''

[[Page 71122]]

[sic] and ``UTILIZES AI & MACHINE LEARNING TECHNOLOGY SIMILAR TO THAT 
USED BY ONLINE GIANTS SUCH AS FACEBOOK, NETFLIX, AMAZON AND STITCH 
FIX.'' Another common issue was the failure to balance promotional 
content with the key risks associated with the investment, such as a 
real estate offering touting the benefit of purchasing properties 
leased by ``investment grade'' tenants without discussing that such 
holdings do not assure a profit or protect against loss. Others failed 
to disclose general risks, such as the speculative nature of the 
securities and the lack of liquidity of the investment.
    Private placement retail communications also feature prominently in 
FINRA's Enforcement program. Since January 1, 2014, FINRA has initiated 
49 disciplinary actions related to non-compliant retail communications 
concerning private placements. This number represents 21% of all 
actions involving private placements.
Filing Proposal
    Given the comparatively high rate of non-compliance of private 
placement retail communications, and the increased risk of investor 
harm associated with those communications, FINRA proposes to amend 
Rules 5122 and 5123 to require such retail communications to be filed, 
in addition to the currently required PPMs, term sheets, and other 
offering documents.
    Rules 5122 and 5123 focus on the private placements that raise the 
greatest concerns--those sold to retail investors, whether or not 
accredited. FINRA proposes to limit the new filing requirement to the 
same offerings; it would not apply to any offerings that are currently 
exempt from filing.\14\ A member would be required to file with FINRA 
such retail communications no later than the date on which a filing is 
required under Rules 5122 and 5123.\15\ The proposal would not require 
members to file private placement retail communications for offerings 
that are not subject to the filing requirements in Rules 5122 or 5123, 
such as sales exclusively to institutional accounts. Moreover, because 
Rules 5122 and 5123 do not impose any filing fees, members would not be 
subject to higher fees because of this additional filing requirement.
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    \14\ See supra notes 8 and 9.
    \15\ As discussed above, Rule 5122 requires a member subject to 
the rule to file the PPM, term sheet or other offering document with 
FINRA at or no later than the first time the document is provided to 
a prospective investor. Any amendments or exhibits to such offering 
documents also must be filed with FINRA within 10 days of being 
provided to any investor or prospective investor. See Rule 
5122(b)(2). Rule 5123 requires a member subject to the rule to file 
with FINRA the PPM, term sheet or other offering document, including 
any materially amended versions thereof, used in connection with the 
sale of securities covered by the rule within 15 calendar days of 
the date of first sale, or notify FINRA that no such offering 
documents were used. See Rule 5123(a).
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    FINRA anticipates that members would be able to file most retail 
communications at the same time and in the same manner that they file 
their PPMs, term sheets, and other offering documents. The rules' 
requirements that material amendments to offering documents must be 
filed also would apply to retail communications.
    If the Commission approves the proposed rule change, FINRA will 
announce the effective date of the proposed rule change in a Regulatory 
Notice to be published no later than 60 days following Commission 
approval. The effective date will be no later than 180 days see 
publication of the Regulatory Notice announcing Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\16\ which requires, among 
other things, that FINRA rules must 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. FINRA believes that requiring the filing of retail 
communications under Rules 5122 and 5123 will improve members' 
compliance and understanding of the application of FINRA's 
communications with the public rules and reduce the likelihood that 
retail investors would receive false or misleading sales material for 
private placements.\17\
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    \16\ 15 U.S.C. 78o-3(b)(6).
    \17\ FINRA recently issued a Regulatory Notice providing 
guidance under Rule 2210 to firms that distribute retail 
communications concerning private placements. See Regulatory Notice 
20-21 (July 1, 2020).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.
Economic Impact Assessment
    FINRA has undertaken an economic impact assessment, as set forth 
below, to analyze the regulatory need for the proposed rule change, its 
potential economic impacts, including anticipated costs, benefits, and 
competitive effects, relative to the current baseline, and the 
alternatives FINRA considered in assessing how best to meet FINRA's 
regulatory objectives.
Regulatory Need
    As discussed above, FINRA has seen significant problems with the 
retail communications that have been voluntarily filed under Rules 5122 
and 5123. In addition, as noted above, the 2018 spot check revealed 
that 76% of retail communications filed under Rules 5122 and 5123 
during the spot check review period involved significant violations of 
Rule 2210.\18\ It is possible that significant violations may be even 
more prevalent among retail communications that have not been 
voluntarily filed or reviewed. Moreover, high-risk retail 
communications concerning private placements feature prominently in 
FINRA's Enforcement program.\19\ 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. The proposed 
amendments, therefore, are intended to promote investor protection and 
market integrity by expanding FINRA's oversight of high-risk retail 
communications concerning private placements.
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    \18\ Among the retail communications reviewed, 45% contained 
prohibited projections or unreasonable forecasts; 44.6% failed to 
provide a sound basis to evaluate the facts with respect to the 
offering in that the benefits articulated in the marketing materials 
were not balanced by key specific risks associated with an 
investment or the issuer; 39.9% failed to adequately disclose the 
general risks associated with private placement investments; 21.8% 
contained readily apparent false or misleading statements or claims; 
and 7.4% contained misleading references to FINRA, other regulators, 
or the benefits of regulation generally.
    \19\ As mentioned earlier, retail communications concerning 
private placements resulted in 49 FINRA disciplinary actions since 
January 2014, representing 21% of FINRA's disciplinary actions 
involving private placements during the period.
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Economic Baseline
    The economic baseline includes the current regulation of retail 
communications under Rule 2210 and current regulation of specified 
private placements under Rules 5122 and 5123. All retail communications 
are required to comply with the general, fair and balanced standards 
detailed in Rule 2210; however, Rule 2210 generally does not require 
members to file with FINRA the materials they use to communicate with 
retail investors concerning private placements. Under Rules 5122 and 
5123, members are required to file with FINRA any PPM,

[[Page 71123]]

term sheet, or other offering document used in connection with 
specified private placements, although these rules do not currently 
require retail communications governed by Rule 2210 to be filed. 
Therefore, firms currently have no regulatory obligation to submit 
these communications for review by FINRA.
    The economic baseline also includes members' existing practices 
under Rules 2210, 5122 and 5123. Currently, some members submit retail 
communications as part of their Rules 5122 and 5123 private placement 
filings with Corp Fin; some members file these communications through 
AdReg's filings review program under Rule 2210 either voluntarily or as 
new members; and some members submit these communications to both or 
neither of these departments.
    As discussed above, upon receiving filings under Rules 5122 and 
5123, Corp Fin triages the filings to select a subset for further 
review based on the relative risk of the offering. Corp Fin notifies 
AdReg when it receives retail communications in connection with the 
higher-risk offerings it assigns for reviews. AdReg then conducts its 
own triage program based on the relative risk of these retail 
communications.
    Once high-risk retail communications are identified, AdReg requests 
Corp Fin to refer them to AdReg and opens a complex review matter to 
assess whether the communications meet applicable communication 
standards. If apparent rule violations are identified, AdReg will, as 
needed, provide an analysis for an existing Corp Fin investigation or 
contact the member firm to explain the concerns, ask the firm to 
remediate the communications, and determine the extent of the 
communications' use. AdReg may resolve the matter with informal 
disciplinary action or, if severe violations are identified, may refer 
the matter to FINRA's Department of Enforcement.\20\
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    \20\ A similar procedure is followed when AdReg receives 
referrals from the Member Supervision examination program or other 
surveillance groups.
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    The existing regulatory procedure concerning private placement 
retail communications that are filed with AdReg under Rule 2210 
voluntarily or by new members adopts a different approach from the 
above. AdReg conducts a review in response to each retail communication 
filing and provides a review letter indicating whether the 
communication appears to be consistent with the applicable standards, 
and if not, the bases for this determination.\21\
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    \21\ Unlike Corp Fin's private placement review program under 
Rules 5122 and 5123, filings through AdReg's filings review program 
under Rule 2210 are subject to filing fees.
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    FINRA has collected information for assessing the specified private 
placement market under Rules 5122 and 5123. On average, FINRA receives 
approximately 2,400 new offering filings annually, with approximately 
10-15% of the filings representing a duplicate filing by separate firms 
with respect to the same offering. As a reference, the Regulation D 
data published by the SEC's Division of Economic and Risk Analysis in 
August 2018 provided that approximately 20,000 new offering filings on 
average were submitted via EDGAR each year from 2015 to 2017. Of this 
total, roughly 4,000 (or 20%) of the new offerings that SEC identified 
involved ``intermediaries'' such as brokers or finders, some of which 
may not be FINRA members. Accordingly, FINRA's private placement review 
program under Rules 5122 and 5123 accounts for approximately half of 
the new offerings filed with the SEC that involve intermediaries and 
approximately 10% of all new offering filings annually.
    To assess how likely the specified private placements use retail 
communications, FINRA has analyzed information pertaining to 1,327 
offerings filed with Corp Fin under Rules 5122 and 5123 during the 
second and third quarters of 2018.\22\ Approximately 781 (or 59%) of 
the offerings did not include retail communications as part of the 
filing. There were 1,062 retail communications submitted by 132 members 
for the remaining 546 offerings.\23\ The average (maximum) number of 
retail communications submitted per member among these offerings was 
eight (260), respectively. The average (maximum) number of retail 
communications per offering was approximately two (23) retail 
communications.
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    \22\ The information was collected by AdReg in the 2018 spot 
check. There were 2,269 filings inclusive of amendments by 309 
member firms related to the 1,327 offerings. Among them, 1,208 had 
projected proceeds totaling $37.6B while projected proceeds were 
unknown for other offerings.
    \23\ Among the 546 offerings that included retail 
communications, 524 of them had projected proceeds totaling $10.8B 
with projected proceeds unknown for the remaining offerings.
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    To further assess the existing regulatory procedure under Rules 
5122 and 5123, FINRA collected review information regarding the 708 
private placement filings with Corp Fin over the period February 1, 
2020 to April 17, 2020.\24\ Corp Fin identified 274 (or 38.7%) of 
filings that contained retail communications during this period. Among 
these 274 filings, 37 (or 13.5%) were deemed by Corp Fin to be high 
risk. AdReg triaged the retail communications in these 37 filings and 
determined that 14 represented likely significant violations of Rule 
2210 and opened 14 complex review matters. These 14 matters represented 
5% of all filings containing retail communications under Rules 5122 and 
5123 during this period.\25\
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    \24\ This sample is different from the previous sample of the 
2018 spot check: It is based on the most recent period for which 
FINRA has reliable data on its triage and review process.
    \25\ FINRA recognizes that the percentage of retail 
communications selected for complex review at any point in time 
(including after the proposed rule change) may deviate from 5%, as 
the time period used for deriving the estimate might be too short to 
draw reliable inferences.
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Economic Impacts
    The proposed rule change would directly impact members that 
distribute retail communications concerning specified private 
placements by requiring them to submit these communications to Corp Fin 
at the time they file the PPM, term sheet, or other offering document. 
Such an impact would be more pronounced for members that have not been 
voluntarily filing private placement retail communications with Corp 
Fin or AdReg. FINRA anticipates a considerable increase in the number 
of retail communications filed under Rules 5122 and 5123 as a result of 
the proposal. As was found during the 2018 spot check, approximately 
41% of the offerings included retail communications voluntarily 
submitted concerning these offerings. If each offering is associated 
with an average of two retail communications, then the number of retail 
communications could be increased by 3,124 retail communications 
annually, totaling 5,308 retail communications per year.
    The estimate of two retail communications per offering may 
overstate or understate the true amount. Note that the average of two 
retail communications per offering found during the spot check may 
understate the true average if members did not voluntarily file all 
retail communications associated with these offerings. Alternatively, 
the average retail communications per offering could be lower than two 
if there were many offerings that did not submit any retail 
communications because they did not distribute any such communications.

[[Page 71124]]

    In developing the proposal, FINRA staff does not expect it to have 
a significant impact on AdReg's existing filings review program. 
Members will continue to have the option (but not the obligation) to 
file these communications through AdReg's filings review program 
following the proposal.\26\
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    \26\ FINRA believes that some members will continue to have 
incentives to file voluntarily retail communications through AdReg's 
filings review program following the proposed amendments. For 
instance, members and related parties may still benefit from a 
review letter indicating the material is consistent with applicable 
standards.
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    The primary benefit of the proposed rule change would arise from 
FINRA's enhanced insight into and oversight of retail communications 
concerning high-risk private placements.\27\ Specifically, the proposed 
amendments would enable FINRA to review all retail communications 
concerning the specified private placements through its triage program 
and if warranted, open cases for complex review, thereby extending 
FINRA's ability to potentially uncover significant violations of Rule 
2210. In addition, retail communications that have not been filed 
voluntarily with Corp Fin or AdReg may have contained violations of 
greater severity or presented novel regulatory issues unknown to FINRA. 
By allowing access to retail communications concerning private 
placements from all filing members, the proposal would help FINRA staff 
understand the scope and severity of existing issues in a more accurate 
and efficient manner, which would further enhance FINRA's surveillance 
and enforcement program.\28\
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    \27\ FINRA recognizes that the proposal would not likely impact 
FINRA's oversight of low-risk offerings or low-risk retail 
communications as defined by the current triage process.
    \28\ Although FINRA does not anticipate immediate changes to its 
existing triage programs, the additional knowledge that FINRA would 
acquire following the proposal could potentially help FINRA refine 
its triage programs in the long run.
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    The proposal likely would increase members' incentives to 
distribute retail communications concerning private placements that are 
fair and balanced and deter them from presenting false or misleading 
information that may cause investor harm. The proposed change may also 
likely increase issuers' incentives to disclose the risks of private 
placements in a fair and balanced manner in connection with retail 
communications, thereby enhancing the capabilities of investors and 
other related parties to assess these risks as part of their investment 
decisions.
    FINRA believes that greater regulatory oversight, together with 
changes in members' and issuers' incentives, would help promote greater 
investor protection and public trust in the private placement markets. 
The benefit from enhanced incentives and regulatory oversight would 
more likely accrue with respect to members that frequently file private 
placements that include retail communications. FINRA recognizes that 
the proposal's investor protection benefits may be limited given that 
members are required to file private placement offerings within 15 
calendar days of the date of first sale under Rule 5123. (Rule 5122 
requires member private offerings to be filed at or prior to the date 
of first sale.) The proposal's investor protection benefits also may 
vary depending on how long the Corp Fin triage process takes and how 
quickly AdReg triages and reviews the communications and the available 
remedying tools.
    FINRA believes that the proposal would impose a minimal increase in 
direct costs to members that have not already been voluntarily filing 
private placement retail communications with Corp Fin. Specifically, 
the proposal would require these members to file any additional retail 
communications that promote the offering at the time they file the PPM 
or term sheet. Members also would be required to file retail 
communications subsequent to the initial filing if they distribute new 
retail communications promoting the offering or make material changes 
to any previously filed retail communications. FINRA believes such 
increases in direct costs would be minimal as Rules 5122 and 5123 do 
not impose filing fees, and most filing members are already familiar 
with the Corp Fin filing system.\29\
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    \29\ FINRA believes that increases in direct costs may be even 
lower for members that have been voluntarily filing private 
placement retail communications with AdReg because they may already 
be familiar with the applicable standards under Rule 2210. These 
members will also have the option to file private placement retail 
communications only with Corp Fin following the rule proposal. This 
option could lead to a reduction in the filing fee for these 
members. However, should firms choose to file only with Corp Fin, 
there will not be a guaranteed review or review letter from FINRA.
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    FINRA recognizes that members that distribute high-risk retail 
communications concerning private placements may be subject to 
additional regulatory review by FINRA as FINRA anticipates an expansion 
in its complex review program following the proposal.\30\ FINRA 
believes the overall increase in regulatory costs and uncertainty to 
members associated with the additional review would likely be low 
because only a very small percentage of retail communications with the 
highest risk profile would be subject to the review. FINRA does not 
expect increases in direct and indirect costs will deter firm entry or 
private placement offerings or result in any significant burden on 
competition that is not necessary or appropriate in furtherance of the 
purpose of the Exchange Act.
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    \30\ FINRA recognizes that misidentifications of high-risk 
matters (i.e., subjecting members that are less likely to pose a 
high risk to investors to the additional complex review) may induce 
unintended indirect costs on these members.
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Alternative Considered
    FINRA considered proposing an amendment to Rule 2210 that would 
require members to submit private placement retail communications 
through AdReg's filings review program. AdReg would review all private 
placement retail communications filed under the alternative proposal. 
The alternative, therefore, would enhance FINRA's oversight of both 
high-risk and low-risk private placement retail communications, leading 
to significant improvement in members' compliance and understanding of 
applicable rules and greater benefit from market integrity and investor 
protection.
    The alternative, however, would impose higher costs on members for 
several reasons. First, members would be subject to filing fees under 
Rule 2210, which would not apply to filings made under Rules 5122 or 
5123. Second, members would have to file retail communications and 
offering documents separately with AdReg and Corp Fin using different 
filing systems. Third, all filing members would face additional 
regulatory costs and uncertainty while the review is pending.\31\ FINRA 
is also concerned that the alternative approach may divert limited 
regulatory resources from high-risk matters. Overall, FINRA believes 
that the current proposal would build on the risk-based regulatory 
approach for private placements thereby promoting regulatory 
consistency and impose lower costs to members than the alternative 
FINRA has considered.
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    \31\ The filing requirements under Rules 5122 and 5123 are 
notice filings only and members do not wait for approval from FINRA 
in connection with a private placement. However, if FINRA asks 
questions of the member in response to its filing, the member may 
become concerned that there may be a potential compliance issue with 
the private placement or related documents. Similarly, the filing 
requirement under Rule 2210 may not have required the member to be 
issued a review letter from FINRA before using a retail 
communication. However, some members may wait until the letter is 
received before using such communication.

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[[Page 71125]]

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2020-038 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2020-038. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10 a.m. and 3 
p.m. Copies of such filing also will be available for inspection and 
copying at the principal office of FINRA. All comments received will be 
posted without change. Persons submitting comments are cautioned that 
we do not redact or edit personal identifying information from comment 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
FINRA-2020-038 and should be submitted on or before November 27, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
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    \32\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-24629 Filed 11-5-20; 8:45 am]
BILLING CODE 8011-01-P