Document ID: SEC-2019-1676-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2019-11-12T05:00Z

[Federal Register Volume 84, Number 218 (Tuesday, November 12, 2019)]
[Notices]
[Pages 61102-61108]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-24494]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87470; File No. SR-FINRA-2019-022]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Partial Amendment No. 1 and Order 
Granting Accelerated Approval of a Proposed Rule Change, as Modified by 
Partial Amendment No. 1, To Amend FINRA Rule 5130 (Restrictions on the 
Purchase and Sale of Initial Equity Public Offerings) and FINRA Rule 
5131 (New Issue Allocations and Distributions)

November 5, 2019.

I. Introduction

    On July 26, 2019, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend FINRA Rule 5130 (Restrictions on the 
Purchase and Sale of Initial Equity Public Offerings) and FINRA Rule 
5131 (New Issue Allocations and Distributions) to exempt additional 
persons and offerings, modify current exemptions to enhance regulatory 
consistency, and address unintended operational impediments. The 
proposed rule change was published for comment in the Federal Register 
on August 8, 2019.\3\ The Commission received six comment letters on 
the proposal.\4\ On September 10, 2019, FINRA extended the time period 
in which the Commission must approve the proposed rule change, 
disapprove the proposed rule change or institute proceedings to 
determine

[[Page 61103]]

whether to approve or disapprove the proposed rule change to November 
6, 2019.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 86558 (August 2, 
2019), 84 FR 39029 (August 8, 2019) (Notice of Filing of File No. 
SR-FINRA-2019-022) (``Original Notice'').
    \4\ See Letter from Robert E. Buckholz, Chair, Federal 
Regulation of Securities Committee, American Bar Association 
Business Law Section, to Vanessa Countryman, Secretary, SEC, dated 
August 27, 2019 (``ABA''); letter from Elliott R. Curzon, Dechert 
LLP, to Jill M. Peterson, Assistant Secretary, SEC, dated August 29, 
2019 (``Dechert 1''); letter from Dechert LLP, to Jill M. Peterson, 
Assistant Secretary, SEC, dated August 29, 2019 (``Dechert 2''); 
letter from Gail C. Bernstein, General Counsel, Investment Adviser 
Association, to Vanessa Countryman, Secretary, SEC, dated August 29, 
2019 (``IAA''); letter from Aseel M. Rabie, Managing Director and 
Associate General Counsel, Securities Industry and Financial Markets 
Association, to Vanessa Countryman, Secretary, SEC, dated August 29, 
2019 (``SIFMA''); and letter from Chris Peterson, to Vanessa 
Countryman, Secretary, SEC, dated September 13, 2019 (``Peterson'').
---------------------------------------------------------------------------

    On October 30, 2019, FINRA responded to the comments and filed 
Partial Amendment No. 1 to the proposal.\5\ The Commission is 
publishing this notice to solicit comments on Partial Amendment No. 1 
from interested persons, and is approving the proposed rule change, as 
modified by Partial Amendment No. 1, on an accelerated basis.
---------------------------------------------------------------------------

    \5\ See letter from Afshin Atabaki, Associate General Counsel, 
FINRA, to Vanessa Countryman, Secretary, Commission, dated October 
30, 2019 (``FINRA Response''). FINRA Response to comments received 
and Partial Amendment No. 1 are available at https://www.finra.org/industry/rule-filings/sr-finra-2019-022. See also Section II.B., 
infra.
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

A. Description of Proposed Rule Change as Originally Filed

    The following is a summary of the proposed rule change as 
originally filed by FINRA.\6\
---------------------------------------------------------------------------

    \6\ See Original Notice, supra note 3, for a complete 
description of the proposal as originally filed.
---------------------------------------------------------------------------

    As described in more detail in the Original Notice, FINRA proposes 
to amend FINRA Rule 5130 (Restrictions on the Purchase and Sale of 
Initial Equity Public Offerings) and FINRA Rule 5131 (New Issue 
Allocations and Distributions) in response to the comments it received 
based on Regulatory Notice 17-14,\7\ as well as FINRA's experience with 
the Rules 5130 and 5131 (or ``the rules''). The proposed rule change 
would exempt additional persons from the scope of the rules, modify 
current exemptions to enhance regulatory consistency, address 
unintended operational impediments, and exempt certain types of 
offerings from the scope of the rules.
---------------------------------------------------------------------------

    \7\ In April 2017, FINRA published Regulatory Notice 17-14 
(Capital Formation) seeking comment on the effectiveness and 
efficiency of its rules, operations and administrative processes 
governing broker-dealer activities related to the capital-raising 
process and their impact on capital formation. FINRA received 11 
comment letters in response to the Regulatory Notice. The Regulatory 
Notice and the comment letters are available at http://www.finra.org/industry/notices/17-14.
---------------------------------------------------------------------------

Family Offices
    The proposed rule change would amend FINRA Rule 5130(i)(4) to 
define a ``family investment vehicle'' as a legal entity that is 
beneficially owned solely by one or more of the following persons: (1) 
``Immediate family members'' as defined under FINRA Rule 5130(i)(5); 
(2) ``family members'' as defined under Advisers Act Rule 
202(a)(11)(G)-1(d)(6); or (3) ``family clients'' as defined under 
Advisers Act Rule 202(a)(11)(G)-1(d)(4); \8\ provided, however, that 
where the beneficial owners of such an entity include family clients, 
the person who has the sole authority to buy or sell securities for 
such an entity is an ``immediate family member'' as defined in FINRA 
Rule 5130(i)(5) or a ``family member'' as defined in Advisers Act Rule 
202(a)(11)(G)-1(d)(6). Where the beneficial owners are not solely 
immediate family members or family members under FINRA Rule 5130(i)(5) 
or Advisers Act Rule 202(a)(11)(G)-1(d)(6), respectively, however, the 
proposed rule change would only provide relief from portfolio manager 
status if the person who has the authority to buy or sell securities 
for the account is an ``immediate family member,'' as defined in FINRA 
Rule 5130, or a ``family member,'' as defined in the Advisers Act.\9\
---------------------------------------------------------------------------

    \8\ The term ``family client'' includes not only family members 
but others, including key employees. See 17 CFR 275.202(a)(11)(G)-
1(d)(4). Therefore, a family investment vehicle that is beneficially 
owned solely by family clients may include beneficial owners that 
are not family members.
    \9\ Further, the proposed relief is only with respect to a 
person's status as a portfolio manager under FINRA Rule 5130. The 
proposed relief does not extend to a person who has a beneficial 
interest in a family investment vehicle and is a restricted person 
based on his or her other activities, such as an associated person 
of a member.
---------------------------------------------------------------------------

Sovereign Entities
    The proposed rule change would exclude sovereign entities from the 
scope of owners of broker-dealers under Rule 5130(i)(10)(E). The 
proposed exclusion would not apply to affiliates of sovereign entities 
that are otherwise restricted. Accordingly, while a sovereign entity 
that owns a broker-dealer would not be considered a restricted person 
under the proposed rule change, the broker-dealer would continue to be 
a restricted person under FINRA Rule 5130.
    The proposed rule change would also amend FINRA Rule 5130(i) 
(Definitions) to define the term ``sovereign entity'' for purposes of 
the rule as ``a sovereign nation or a pool of capital or an investment 
fund owned or controlled by a sovereign nation and created for the 
purpose of making investments on behalf of the sovereign nation.'' The 
proposed rule change would further define the term ``sovereign nation'' 
as ``a sovereign nation or its political subdivisions, agencies or 
instrumentalities.''
Foreign Employee Retirement Benefits Plans
    The proposed rule change would also amend FINRA Rule 5130(c) 
(General Exemptions) to provide an exemption for an employee retirement 
benefits plan organized under and governed by the laws of a foreign 
jurisdiction, provided that such a plan or family of plans: (1) Has, in 
aggregate, at least 10,000 participants and beneficiaries and $10 
billion in assets; (2) is operated in a non-discriminatory manner 
insofar as a wide range of employees, regardless of income or position, 
are eligible to participate without further amendment or action by the 
plan sponsor; \10\ (3) is administered by trustees and managers that 
have a fiduciary obligation to administer the funds in the best 
interests of the participants and beneficiaries; and (4) is not 
sponsored by a broker-dealer. The proposed rule change would also amend 
Rule 5131(b)(2) to add a corresponding exemption (regarding employee 
retirement benefits plans) to Rule 5131.
---------------------------------------------------------------------------

    \10\ The definition of ``broad-based foreign retirement plan'' 
under Section 409A of the IRC includes a substantially similar 
condition. See 26 CFR 1.409A-1(a)(3)(v)(A). Section 409A imposes 
restrictions on the deferral of compensation by employees, directors 
and independent contractors. Section 409A provides an exemption for 
compensation deferred under certain broad-based foreign retirement 
plans.
---------------------------------------------------------------------------

Alternative Conditions for Foreign Investment Company Exemption
    FINRA also proposes to amend paragraph (c)(6) of FINRA Rule 5130 to 
exempt sales to and purchases by an investment company organized under 
the laws of a foreign jurisdiction, provided that: (1) The investment 
company is listed on a foreign exchange for sale to the public or 
authorized for sale to the public by a foreign regulatory authority; 
(2) no person owning more than five percent of the shares of the 
investment company is a restricted person, the investment company has 
100 or more direct investors, or the investment company has 1,000 or 
more indirect investors; and (3) the investment company was not formed 
for the specific purpose of investing in new issues.\11\
---------------------------------------------------------------------------

    \11\ The proposed rule change would also impact an identical 
exemption cross referenced in paragraph (b)(2) of FINRA Rule 5131.
---------------------------------------------------------------------------

Exclusion for Foreign Offerings
    In addition, the proposed rule change would expressly exclude from 
Rules 5130 and 5131 offerings that are conducted pursuant to Regulation 
S, which provides a safe harbor from the registration requirements of 
the Securities Act for offshore offers and sales of securities, as well 
as other offerings made outside of the United States or its territories 
(i.e., not just

[[Page 61104]]

those that are expressly designated as Regulation S offerings).
Issuer-Directed Securities
    To more closely align FINRA Rule 5130(d) with the issuer-directed 
provision in Rule 5131.01, the proposed rule change would also amend 
paragraphs (d)(1) and (d)(2) of Rule 5130 to expand the exemption for 
issuer-directed securities to allocations directed by affiliates and 
selling shareholders of the issuer. The proposed rule change would also 
clarify that the exemption applies to shares that are specifically 
directed in writing by the issuer.
Exclusion for Unaffiliated Charitable Organizations
    The proposed rule change also would amend paragraph (e)(3) of Rule 
5131 (Definitions) to exclude unaffiliated charitable organizations, as 
that term is elsewhere defined in the rule,\12\ from the definition of 
``covered non-public company'' so that an executive officer or director 
of a charitable organization that is not affiliated with the member 
allocating IPO shares would not become the subject of the rule's 
spinning provision solely on the basis of that service.
---------------------------------------------------------------------------

    \12\ An ``unaffiliated charitable organization'' is a tax-exempt 
entity organized under Section 501(c)(3) of the IRC that is not 
affiliated with the member and for which no executive officer or 
director of the member, or person materially supported by such 
executive officer or director, is an individual listed or required 
to be listed on Part VII of Internal Revenue Service Form 990 (i.e., 
officers, directors, trustees, key employees, highest compensated 
employees and certain independent contractors). See FINRA Rule 
5131(e)(9).
---------------------------------------------------------------------------

Addition of Anti-Dilution Provision to FINRA Rule 5131
    The proposed rule change would also amend Rule 5131(b)'s spinning 
provision to add an anti-dilution provision to the rule (similar to the 
one in Rule 5130(e)), which would allow an executive officer or 
director of a public company or a covered non-public company (or a 
person materially supported by such a person) to retain the percentage 
equity ownership in the issuer at a level up to the ownership interest 
as of three months prior to the filing of the registration statement, 
provided that the other conditions are met.

B. Notice of Partial Amendment No. 1

1. Introduction
    Set forth in Section II.B.2 below is the summary of Partial 
Amendment No. 1 to the proposed rule changes, as prepared and submitted 
by FINRA to the Commission.\13\
---------------------------------------------------------------------------

    \13\ The text of Partial Amendment No. 1, including Exhibit 4 
(which reflects changes to the text of the proposed rule change 
pursuant to Partial Amendment No. 1) and Exhibit 5, (which reflects 
all proposed changes to the current rule text, as amended by Partial 
Amendment No. 1), is available on FINRA's website at: https://www.finra.org/industry/rule-filings/sr-finra-2019-022.
---------------------------------------------------------------------------

2. Self-Regulatory Organization's Description of the Proposal, as 
Modified by Partial Amendment No. 1
    As discussed in the FINRA Response to comments,\14\ Partial 
Amendment No. 1 makes the following changes to the proposed rule 
change:
---------------------------------------------------------------------------

    \14\ See supra note 5.
---------------------------------------------------------------------------

    [rtarr8] Amends proposed Rule 5130(i)(4) to remove the proposed 
limitation on portfolio managers of certain family investment vehicles;
    [rtarr8] modifies proposed Rule 5130(c)(6) to provide that a 
foreign public investment company may not be formed for the specific 
purpose of permitting restricted persons to invest in new issues;
    [rtarr8] revises proposed Rule 5130(c)(8) to also exclude employee 
retirement benefits plans organized in the United States that meet the 
proposed conditions;
    [rtarr8] amends proposed Rule 5130(i)(9) to limit the proposed 
exclusion for foreign offerings to offerings that do not include shares 
that are concurrently registered for sale in the United States;
    [rtarr8] adds proposed Rules 5130.01 and 5131.05 to clarify the 
application of the rules to independent allocations to non-U.S. persons 
by foreign non-member broker-dealers participating in an underwriting 
syndicate;
    [rtarr8] revises current Rule 5131.01 and proposed Rules 5130(d)(1) 
and (d)(2) to clarify that the rules apply to securities directed by a 
single affiliate or a single selling shareholder;
    [rtarr8] amends current Rule 5130(d)(1)(B) to expressly recognize 
employees or directors of affiliated franchisees;
    [rtarr8] excepts certain transfers to immediate family members from 
current Rule 5131(d)(2)(B)'s public announcement requirement;
    [rtarr8] amends current Rule 5131.03 to codify existing guidance 
regarding the disclosure of a release or waiver in a publicly filed 
registration statement;
    [rtarr8] excludes from the definition of ``new issue'' in proposed 
Rule 5130(i)(9) offerings of a special purpose acquisition company 
(``SPAC'');
    [rtarr8] modifies proposed Rule 5130(i)(11) to include other types 
of sovereign investment vehicles; and
    [rtarr8] amends proposed Rule 5130(i)(10)(E) to remove the 
reference to persons listed in Schedule C of Form BD (Uniform 
Application for Broker-Dealer Registration).
    FINRA is also proposing in this Partial Amendment No. 1 to make a 
technical correction to proposed FINRA Rule 5130(i)(9) to replace the 
references to offerings made pursuant to Section 4(1), 4(2) or 4(6) of 
the Securities Act of 1933 (``Securities Act'') with offerings made 
pursuant to Section 4(a)(1), 4(a)(2) or 4(a)(5) of the Securities Act.
Family Investment Vehicles
    Proposed Rule 5130(i)(4) requires that where the beneficial owners 
of a family investment vehicle include family clients, which may 
include beneficial owners that are not family members, the person who 
has the sole authority to buy or sell securities for such an entity 
must be an ``immediate family member'' as defined in Rule 5130(i)(5) or 
a ``family member'' as defined in Rule 202(a)(11)(G)-1(d)(6) under the 
Investment Advisers Act of 1940 (``Advisers Act'') for the entity to be 
considered a family investment vehicle for purposes of Rule 5130.
    Dechert 1, Dechert 2 and SIFMA state that the proposed limitation 
ignores practical realties of how family offices operate and is 
contrary to FINRA's stated goal of harmonizing Rule 5130 with the 
Advisers Act's treatment of family offices. Dechert 1 and Dechert 2 
state that family offices often hire investment professionals that are 
not family members to provide investment advice based on delegated 
authority. Moreover, they note that the Commission, in adopting the 
Family Office Rule under the Advisers Act, recognized that non-family 
members that are integral to the functioning of the family office, 
including investment professionals that are hired by the family office, 
should be able to invest alongside family members in order to align 
their interests with the interests of the family.
    FINRA does not believe that the proposed limitation serves any 
meaningful purpose given the Commission's express recognition that 
investment professionals that are non-family members may provide 
investment advice to family offices and invest together with family 
members in order to have aligned interests. In addition, FINRA's 
current definition of ``family investment vehicle'' allows investments 
by non-family members in such an entity,\15\ without placing any

[[Page 61105]]

limitations on the person with the authority to make investment 
decisions for the entity. Therefore, in this Partial Amendment No. 1, 
FINRA is revising proposed Rule 5130(i)(4) to remove the proposed 
limitation.
---------------------------------------------------------------------------

    \15\ The definition of ``immediate family member'' under FINRA 
Rule 5130 includes any individual who is materially supported by the 
family, which could encompass non-family members. See FINRA Rule 
5130(i)(5).
---------------------------------------------------------------------------

Foreign Public Investment Companies
    Proposed Rule 5130(c)(6) provides that a foreign public investment 
company that is formed for the specific purpose of investing in new 
issues would not be eligible for an exemption. The ABA suggests that 
FINRA modify the proposed condition to provide that the investment 
company may not be formed for the specific purpose of permitting 
restricted persons to invest in new issues, which is more narrowly 
tailored to address the concerns Rule 5130 is designed to address while 
preserving a foreign public investment company's flexibility to make 
portfolio decisions. FINRA agrees with the comment by the ABA regarding 
the scope of the proposed condition regarding new issue investments by 
foreign public investment companies. In this Partial Amendment No. 1, 
FINRA is revising proposed Rule 5130(c)(6) to narrow the scope of the 
condition to provide that a foreign public investment company may not 
be formed for the specific purpose of permitting restricted persons to 
invest in new issues. This change also impacts an identical exemption 
in Rule 5131(b)(2).
Foreign Employee Retirement Benefits Plans
    Proposed Rule 5130(c)(8) provides an exemption for foreign employee 
retirement benefits plans, subject to specified conditions. SIFMA 
requests that the proposed exemption be extended to employee retirement 
benefits plans organized in the United States that do not otherwise 
qualify for an exemption under the current provisions of Rule 5130 
relating to Employee Retirement Income Security Act benefits plans and 
state or municipal government benefits plans. FINRA agrees with SIFMA's 
comment, which is also consistent with FINRA staff's prior exemptive 
relief to such plans. In this Partial Amendment No. 1, FINRA is 
revising proposed Rule 5130(c)(8) to extend the exemption to employee 
retirement benefits plans organized in the United States that meet the 
proposed conditions. In addition, this change impacts a corresponding 
exemption to Rule 5131(b)(2).
Foreign Offerings
    Proposed Rule 5130(i)(9) excludes from the definition of ``new 
issue'' offerings made under Regulation S of the Securities Act or 
otherwise made outside of the United States or its territories. SIFMA 
and the ABA request that FINRA clarify the scope of the exclusion, 
including in situations where shares offered and sold in a foreign 
offering are concurrently registered for sale in the United States or 
where foreign non-member broker-dealers participating in an 
underwriting syndicate independently allocate shares to non-U.S. 
persons.
    The proposed blanket exclusion from the definition of ``new issue'' 
is limited to a foreign offering, pursuant to Regulation S or 
otherwise, where shares in the offering are not concurrently registered 
for sale in the United States. While shares in a foreign offering that 
are concurrently registered for sale in the United States would not be 
categorically excluded from the definition of ``new issue'' under Rules 
5130 and 5131, FINRA does not believe that the concerns the rules are 
designed to address are implicated where foreign non-member broker-
dealers that are participating in an underwriting syndicate with 
members are independently allocating new issues to non-U.S. persons.
    In this Partial Amendment No. 1, FINRA is revising proposed Rule 
5130(i)(9) to clarify that the exclusion for foreign offerings does not 
extend to shares of such offerings that are concurrently registered for 
sale in the United States. This change will also impact the definition 
of ``new issue'' under Rule 5131.\16\ This Partial Amendment No. 1 also 
adds Supplementary Material .01 to Rule 5130 and Supplementary Material 
.05 to Rule 5131 to clarify that the rules are not intended to restrict 
new issue allocations to non-U.S. persons by foreign non-member broker-
dealers participating in the underwriting syndicate, provided that such 
allocation decisions are not made at the direction or request of a 
member or an associated person of a member.
---------------------------------------------------------------------------

    \16\ Rule 5131(e)(7) defines the term ``new issue'' by reference 
to Rule 5130(i)(9).
---------------------------------------------------------------------------

Issuer-Directed Securities
    Proposed Rules 5130(d)(1) and (d)(2) expand the exclusion for 
issuer-directed securities to allocations directed by affiliates and 
selling shareholders of the issuer, which is consistent with the 
issuer-directed provision in current Rule 5131.01.
    SIFMA requests that FINRA revise current Rule 5131.01 and proposed 
Rules 5130(d)(1) and (d)(2) to clarify that a single affiliate or a 
single selling shareholder may direct securities. The ABA requests that 
FINRA also amend current Rule 5130(d)(1)(B), which relates to issuer-
directed allocations to broker-dealer personnel, or members of their 
immediate family, who are employees or directors of the issuer, the 
issuer's parent, or a subsidiary of the issuer or the issuer's parent, 
to expressly recognize employees or directors of franchisees of such 
entities.
    In response to the comments, in this Partial Amendment No. 1, FINRA 
is revising current Rule 5131.01 and proposed Rules 5130(d)(1) and 
(d)(2) to make a technical change to clarify that the issuer-directed 
provisions apply to securities directed by a single affiliate or a 
single selling shareholder. Further, in this Partial Amendment No. 1, 
FINRA is amending current Rule 5130(d)(1)(B) to expressly recognize 
employees or directors of a franchisee in a franchisor/franchisee 
relationship.
Lock-Up Agreements
    Current Rule 5131(d)(2) requires that any lock-up agreement 
applicable to the officers and directors of an issuer entered into in 
connection with a new issue stipulate that, at least two business days 
before the release or waiver of any lock-up or other restriction on the 
transfer of the issuer's shares, the book-running lead manager must 
notify the issuer of the impending release or waiver and the impending 
release or waiver must be announced through a major news service. The 
rule provides an exception where the release or waiver is for a 
transfer that is not for consideration and where the transferee has 
agreed in writing to be bound by the same lock-up agreement terms in 
place for the transferor.
    The ABA suggests that FINRA eliminate the ``consideration'' element 
for purposes of the exception to the rule. By way of example, the ABA 
notes that it may be difficult to ascertain whether a transfer is for 
``consideration'' in certain situations involving transfers to 
immediate family members. The ABA also requests that FINRA codify 
guidance published in Regulatory Notice 10-60 (November 2010) regarding 
disclosure of a release or waiver in a publicly filed registration 
statement.
    FINRA continues to believe that the lack of consideration (that is, 
where there is no exchange of something of value) is relevant for 
purposes of satisfying the exception to the public announcement 
requirement under Rule 5131(d)(2). However, FINRA agrees with the ABA 
that it may be difficult to determine whether a transfer is for 
consideration in situations involving transfers to immediate family 
members.

[[Page 61106]]

Moreover, FINRA does not believe that a transfer of securities to an 
immediate family member who is subject to the same lock-up restrictions 
as the transferor necessitates a public announcement. Therefore, in 
this Partial Amendment No. 1, FINRA is amending current Rule 
5131(d)(2)(B) to extend the exception to transfers to immediate family 
members as defined in Rule 5130(i)(5), provided that the transferee has 
agreed in writing to be bound by the same lock-up agreement terms in 
place for the transferor. In addition, in this Partial Amendment No. 1, 
FINRA is amending current Rule 5131.03 to provide that the disclosure 
of a release or waiver in a publicly filed registration statement in 
connection with a secondary offering satisfies the requirement for an 
announcement through a major news service, which codifies the prior 
guidance published in Regulatory Notice 10-60.
SPACs
    Rule 5130(i)(9) currently excludes from the definition of ``new 
issue'' offerings of business development companies, direct 
participation programs and real estate investment trusts. FINRA 
excluded offerings of these entities based on the fact that their 
securities typically commence trading at the public offering price with 
little potential for trading at a premium because their assets at the 
time the initial public offering trades consist of the capital they 
have raised through the offering process. Moreover, FINRA states that 
if there is a premium, it is generally small.
    FINRA states in its filing that a SPAC is a blind pool that offers 
units in an SEC-registered initial public offering (``IPO'') to 
investors for the purpose of completing an acquisition of an existing 
private company in the future. FINRA also states that the IPO consists 
of common stock of the SPAC and typically includes a warrant to 
purchase common stock of the SPAC in the event that the SPAC completes 
an acquisition. The SPAC has generally 18 months to 24 months after the 
IPO to find a suitable target and sign a purchase agreement to acquire 
the target company. FINRA also states that SPACs are generally focused 
on a particular industry segment, and they hire management in those 
areas to explore and evaluate acquisition opportunities.
    FINRA further states that the money raised by a SPAC from the 
issuance of units in an IPO is deposited in a trust account that is 
funded with an amount of money equaling the total of the proceeds from 
the IPO (less certain offering expenses). Because a SPAC's assets at 
the time of the IPO consist of the capital raised through the offering 
process (less certain offering expenses), FINRA states that there is 
little potential for SPACs to trade at a premium at the time of the IPO 
prior to signing an acquisition or merger agreement with a suitable 
target company. Moreover, FINRA states that SPACs rarely trade at a 
premium, and if there is a premium, it is generally small.
    The ABA requests that FINRA consider excluding offerings of SPACs 
from the definition of ``new issue'' because such offerings have 
similar trading characteristics to offerings of other entities that 
FINRA has already excluded from the definition of ``new issue,'' 
including offerings of registered closed-end investment companies, 
business development companies, direct participation programs and real 
estate investment trusts.
    FINRA agrees that offerings of SPACs have similar characteristics 
to other offerings that are currently excluded from the definition of 
``new issue'' and, thus, offerings of SPACs should also be excluded. In 
this Partial Amendment No. 1, FINRA is revising proposed Rule 
5130(i)(9) to exclude offerings of SPACs. As noted above, FINRA states 
that this change will also impact the definition of ``new issue'' under 
Rule 5131 because the term has the same meaning under both rules.
Owners of Broker-Dealers
    Proposed Rule 5130(i)(10)(E) excludes sovereign entities from the 
scope of owners of broker-dealers. Proposed Rule 5130(i)(11) defines a 
``sovereign entity'' as a sovereign nation or a pool of capital or an 
investment fund owned or controlled by a sovereign nation and created 
for the purpose of making investments on behalf of the sovereign 
nation. The ABA requests that FINRA make a technical change to the 
proposed definition to also include other vehicles owned or controlled 
by a sovereign nation that are created for the purpose of making 
investments for the benefit of the sovereign nation. FINRA is revising 
proposed Rule 5130(i)(11) in this Partial Amendment No. 1 to make this 
technical change.
    Rule 5130(i)(10)(E) currently includes as restricted persons any 
person listed, or required to be listed, in Schedule C of Form BD that 
has an ownership interest above specified thresholds. FINRA (then NASD) 
originally included the reference to Schedule C because it shows any 
additions, deletions and other changes to Schedules A and B of Form BD. 
SIFMA requests that the reference to Schedule C be removed from Rule 
5130(i)(10)(E) because it is superfluous. In this Partial Amendment No. 
1, FINRA is deleting from proposed Rule 5130(i)(10)(E) the reference to 
persons listed in Schedule C of Form BD because currently the changes 
made on Schedule C are reflected in the Central Registration Depository 
system through the composite Schedules A and B.

III. Discussion and Commission Findings

    After careful review of the proposal and the comment letters, the 
Commission finds that the proposed rule change, as modified by Partial 
Amendment No. 1, is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
association.\17\ In particular, the Commission finds that the proposed 
rule change, as amended, is consistent with Section 15A(b)(6) of the 
Act,\18\ which requires, among other things, that FINRA's rules be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest; and are not designed to permit unfair discrimination between 
customers, issues, brokers, or dealers. The Commission also finds that 
the proposed rule change, as amended, is consistent with Section 
15A(b)(9) of the Act, which requires that FINRA rules not impose any 
burdens on competition not necessary or appropriate in furtherance of 
the purposes of the Act.\19\
---------------------------------------------------------------------------

    \17\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \18\ 15 U.S.C. 78o-3(b)(6).
    \19\ 15 U.S.C. 78o-3(b)(9).
---------------------------------------------------------------------------

    FINRA states that the proposed rule change, as modified by Partial 
Amendment No. 1, will further these purposes by promoting capital 
formation and aiding member compliance efforts while maintaining the 
integrity of the public offering process and investor confidence in the 
capital market. FINRA also states that the proposed rule change to 
Rules 5130 and 5131 will remove unnecessary impediments to capital 
formation and lessen burdens in the public offering process. 
Specifically, FINRA states that the proposed rule change will reduce 
both the costs and uncertainty in determining whether an investor is 
subject to the restrictions of Rules 5130 and 5131. FINRA states that 
the proposed rule change also may increase the pool of investors 
eligible to purchase

[[Page 61107]]

new issues and, thus, encourage capital formation. Moreover, the 
proposed rule change creates two alternative conditions that a 
qualifying foreign investment company have $100 or more direct 
investors at 1,000 or more indirect investor. These proposed 
alternative conditions would provide additional flexibility to foreign 
investment companies to demonstrate their eligibility for the 
exemption, and thereby enhance their ability to purchase new issues. 
The proposed rule change would also further the above purposes by 
clarifying the scope of Rule 5130 and 5131 by excluding Regulation S 
offerings and other offering made outside the United States or its 
territories from the scope of the rules. The proposed rule change would 
also harmonize Rule 5130 and 5131 with other FINRA rules relating to 
securities offerings, FINRA Rules 5110 and 5121, which currently 
exclude foreign offerings. FINRA believes that the proposed rule change 
will remove the burdens associated with complying with both U.S. and 
foreign regulatory regimes relating to public offerings and will lead 
to an increase in the pool of eligible investors for offshore offerings 
of new issues without undermining the fairness of U.S. public capital 
markets. FINRA believes that an increase in the pool of eligible 
investors could lead to a lower cost of capital for issuers engaged in 
foreign offerings.
    To further the purposes of Rules 5130 and 5131, the proposed change 
would also align the issuer-directed provisions of Rules 5130 and 5131, 
provide regulatory consistency across the rules, and remove the 
compliance costs of applying different standards.
    FINRA also proposes to exclude ``unaffiliated charitable 
organizations'' from the definition of ``covered non-public company,'' 
stating that the concerns addressed by the rules are not implicated 
with respect to executive officers and directors of charitable 
organizations that are not affiliated with a member. According to 
FINRA, this should ease the burden on the firms as they will no longer 
be required to consider whether an investment banking relationship 
exists vis-[agrave]-vis the member and an unaffiliated charitable 
organization when an individual with a beneficial interest in an 
account is an executive officer or director (or materially supported by 
such a person) of such an organization.
    FINRA also proposes to add an anti-dilution provision to Rule 5131 
to ameliorate the current inconsistency between the Rules 5130 and 5131 
in terms of equity ownership interest. The proposed rule change would 
add an anti-dilution provision to Rule 5131 (similar to that of Rule 
5130) to address the unintentional result of officers or directors of 
public companies and covered non-public companies may experience 
diminished ownership interest upon a public offering and a transfer of 
wealth from them to those investors that are able to purchase shares in 
the new offering.
    FINRA does not believe that the proposed rule change, as modified 
by Partial Amendment No. 1, will result in any burden on competition 
that is not necessary or appropriate in furtherance of the purpose of 
the Act. FINRA also believes that the proposed rule change, as modified 
by Partial Amendment No. 1 will remove unnecessary impediments to 
capital formation and lessen burdens in the public offering process. 
Thus, the proposed rule change, as modified by Partial Amendment No. 1, 
strikes the appropriate balance by promoting capital formation and 
aiding member compliance efforts while maintaining the protections that 
Rules 5130 and 5131 are designed to provide. Consequently, the 
Commission finds that the proposed rule change is designed to promote 
capital formation and aid member compliance efforts, while maintaining 
the integrity of the public offering process and investor confidence in 
the capital markets.
    For these reasons, the Commission finds that the proposed rule 
change, as modified by Partial Amendment No. 1, is consistent with 
Sections 15A(b)(6) and 15A(b)(9) of the Act and the rules and 
regulations thereunder applicable to a national securities association.

IV. Accelerated Approval of Proposed Rule Change, as Modified by 
Partial Amendment No. 1

    The Commission finds good cause to approve the proposed rule 
change, as modified by Partial Amendment No. 1, prior to the 30th day 
after the date of publication of notice of the filing of Partial 
Amendment No. 1 in the Federal Register. As discussed above, the 
proposed rule change, as modified by Partial Amendment No. 1, would 
exempt additional persons from the scope of these rules, modify current 
exemptions to enhance regulatory consistency, address unintended 
operational impediments, and exempt certain types of offerings from the 
scope of these rules. As such, the proposed rule change, as modified by 
Partial Amendment No. 1, would promote capital formation and aid member 
compliance efforts while maintaining the protections that Rules 5130 
and 5131 are designed to provide (i.e., maintaining the integrity of 
the public offering process and investor confidence in the capital 
markets).
    Accordingly, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Act,\20\ to approve the proposed rule change, SR-FINRA-
2019-022, as modified by Partial Amendment No. 1, on an accelerated 
basis.
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

V. Solicitation of Comments on Partial Amendment No. 1

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Partial Amendment 
No. 1 to 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-2019-022 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-2019-022. 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 10:00 a.m. and 
3:00 p.m. Copies of the 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

[[Page 61108]]

submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to the File Number SR-
FINRA-2019-022 and should be submitted on or before December 3, 2019.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\21\ that the proposed rule change, as modified by Partial Amendment 
No. 1 (SR-FINRA-2019-022) be, and it hereby is, approved on an 
accelerated basis.
---------------------------------------------------------------------------

    \21\ Id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
---------------------------------------------------------------------------

    \22\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-24494 Filed 11-8-19; 8:45 am]
 BILLING CODE 8011-01-P