Document ID: SEC-2012-0942-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2012-06-13T04:00Z

[Federal Register Volume 77, Number 114 (Wednesday, June 13, 2012)]
[Notices]
[Pages 35457-35462]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-14340]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67157; File No. SR-FINRA-2011-057]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Amendments No. 2 and No. 3 and 
Order Granting Accelerated Approval of Proposed Rule Change, as 
Modified by Amendments No. 1, No. 2, and No. 3 to Adopt FINRA Rule 5123 
(Private Placements of Securities) in the Consolidated FINRA Rulebook

June 7, 2012.

I. Introduction

    On October 5, 2011, the 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 (``Exchange Act'' or ``Act'') \1\ and 
Rule 19b-4 thereunder,\2\ a proposed rule change to adopt FINRA Rule 
5123 (``Private Placements of Securities'').\3\ The proposed rule 
change was published for comment in the Federal Register on October 24, 
2011.\4\ The Commission received sixteen (16) comment letters in 
response to the original proposed rule change (``Original 
Proposal'').\5\ On January 19, 2012, FINRA filed Amendment No. 1 to the 
proposed rule change and a letter responding to comments.\6\ In order 
to solicit additional input from interested parties on the issues 
presented in FINRA's proposed rule change, on January 20, 2012, the 
Commission published notice of Amendment No. 1 for comment and an order 
instituting proceedings pursuant to Section 19(b)(2)(B) of the Act, to 
determine whether to approve or disapprove the proposed rule change, as 
modified by Amendment No. 1.\7\ The Commission received eleven (11) 
comment letters in response to the Notice and Proceedings Order.\8\ On 
March 12, 2012, FINRA filed Amendment No. 2 to the proposed rule change 
and a letter responding to comments.\9\ On March 22, 2012, FINRA filed 
Amendment No. 3 to the proposed rule change.\10\ In Amendment No. 2, as 
further clarified by Amendment No. 3, FINRA proposed eliminating the 
Original Proposal's requirement for members to disclose to investors 
the anticipated use of offering proceeds, and the amount and type of 
offering expenses and offering compensation. Instead, FINRA proposed to 
limit members' obligations under proposed

[[Page 35458]]

Rule 5123 to filing any existing offering document (including any 
material amendment thereto) used in connection with a sale of the 
subject securities within 15 calendar days of the date of first sale, 
or to identify that no such document was used. The Commission is 
publishing this notice and order (``Notice and Order'') to solicit 
comment on Amendments No. 2 and No. 3 and to approve the proposed rule 
change, as modified by Amendments No. 1, No. 2, and No. 3, on an 
accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Prior to filing the rule change with the Commission, in 
January 2011, FINRA published Regulatory Notice 11-04 requesting 
comment on proposed amendments to Rule 5122 (``Private Placement of 
Securities Issued by Members''). FINRA Rule 5122 established 
disclosure and filing requirements for members and associated 
persons offering or selling any security issued by a member or a 
member's control entity in a non-public offering of securities 
conducted in reliance on certain available exemptions from 
registration under the Securities Act of 1933 (``Securities Act''). 
As originally proposed, the proposed rule change would have amended 
Rule 5122 to include similar disclosure and filing requirements for 
members and associated persons offering or selling any security 
issued by a non-member in a non-public offering of securities 
conducted in reliance on certain available exemptions from 
registration under the Securities Act. A copy of the regulatory 
notice is available on FINRA's Web site at http://www.finra.org. The 
comment period expired on March 14, 2011. FINRA received 35 comments 
in response to the regulatory notice.
    \4\ See Exchange Act Release No. 65585 (Oct. 18, 2011), 76 FR 
65758 (Oct. 24, 2011) (Notice of Filing of Proposed Rule Change to 
Adopt New FINRA Rule 5123 (Private Placements of Securities)) 
(``Notice of Filing''). The comment period closed on November 18, 
2011.
    \5\ See Letters from Ryan Adams, Christine Lazaro, Esq., and 
Lisa Catalano, Esq., St. John's School of Law Securities Arbitration 
Clinic, dated November 10, 2011 (``St. John's Letter''); Ryan K. 
Bakhtiari, President, Public Investors Arbitration Bar Association, 
dated November 14, 2011 (``PIABA Letter''); David T. Bellaire, Esq., 
Financial Services Institute, Inc., dated November 14, 2011 (``FSI 
Letter''); Robert E. Buckholz, Chair, Committee on Securities 
Regulation, New York City Bar Association, dated November 9, 2011 
(``NYC Bar-November Letter''); Richard B. Chess, President, Real 
Estate Investment Securities Association, dated November 14, 2011 
(``REISA-November Letter''); Alicia M. Cooney, Managing Director, 
Monument Group, dated January 12, 2012 (``Monument Group-January 
Letter''); Martel Day, Chairman, Investment Program Association, 
dated November 14, 2011 (``IPA Letter''); Jack E. Herstein, 
President, North American Securities Administrators Association, 
Inc., dated November 17, 2011 (``NASAA-November Letter''); Joan 
Hinchman, Executive Director, National Society of Compliance 
Professionals, dated November 14, 2011 (``NSCP Letter''); William A. 
Jacobson, Associate Clinical Professor, and Carolyn L. Nguyen, 
Cornell Law School, dated November 14, 2011 (``Cornell-November 
Letter''); Stuart J. Kaswell, Executive Vice President, Managed 
Funds Association, dated November 14, 2011 (``MFA Letter''); William 
H. Navin, Senior Vice President, The Options Clearing Corporation, 
dated November 9, 2011 (``OCC Letter''); Jeffrey W. Rubin, Chair, 
Federal Regulation of Securities Committee, American Bar 
Association, dated November 14, 2011 (``ABA Letter''); Sullivan & 
Cromwell LLP, dated November 10, 2011 (``S&C-November Letter''); 
Osamu Watanabe, Deputy General Counsel, Moelis & Co., dated November 
28, 2011 (``Moelis Letter''); and Donald S. Weiss, K&L Gates LLP, 
dated November 14, 2011 (``K&L Gates Letter''). Comment letters are 
available at www.sec.gov.
    \6\ See Letter from Stan Macel, Assistant General Counsel, 
FINRA, dated January 19, 2012 (``Response Letter''). The text of 
proposed Amendment No. 1 and FINRA's Response Letter are available 
on FINRA's Web site at http://www.finra.org, at the principal office 
of FINRA, and at the Commission's Public Reference Room. FINRA's 
Response Letter is also available on the Commission's Web site at 
www.sec.gov.
    \7\ See Exchange Act Release No. 66203 (Jan. 20, 2012); 77 FR 
4065 (Jan. 26, 2012) (Notice of Filing of Partial Amendment No. 1 
and Order Instituting Proceedings to Determine Whether to Approve or 
Disapprove a Proposed Rule Change, as modified by Partial Amendment 
No. 1, to Adopt FINRA Rule 5123 (Private Placements of Securities) 
in the Consolidated FINRA Rulebook)) (``Notice and Proceedings 
Order''). The comment period closed on February 27, 2012 and FINRA's 
rebuttal period closed on March 12, 2012.
    \8\ See Letters from Wesley A. Brown, Managing Director and 
Chief Compliance Officer, St. Charles Capital, LLC, dated February 
26, 2012 (``St. Charles Letter''); Robert E. Buckholtz, Chair, 
Committee on Securities Regulation, New York City Bar Association, 
dated February 24, 2012 (``NYC Bar-February Letter''); Alicia M. 
Cooney, Managing Director, Monument Group, Inc., dated February 27, 
2012 (``Monument Group-February Letter''); Jack E. Herstein, NASAA 
President and Assistant Director, Nebraska Department of Banking and 
Finance Bureau of Securities, dated April 23, 2012 (``NASAA-April 
Letter''); William A. Jacobson, Associate Clinical Professor of Law, 
Cornell Law School, and Director, Cornell Securities Law Clinic, 
dated February 27, 2012 (``Cornell-February Letter''); Stuart J. 
Kaswell, Executive Vice President, Managed Funds Association, dated 
February 27, 2012 (``MFA-February Letter''); Douglas Martin, dated 
February 1, 2012 (``Martin Letter''); National Investment Banking 
Association, dated February 27, 2012 (``NIBA Letter''); Daniel 
Oschin, President, Real Estate Investment Securities Association, 
dated February 27, 2012 (``REISA-February Letter''); G. Philip 
Rutledge, attorney, dated April 27, 2012 (``Rutledge Letter''); and 
Sullivan & Cromwell LLP, dated February 23, 2012; (``S&C-February 
Letter'').
    \9\ See Letter from Stan Macel, FINRA, dated March 12, 2012 
(``Rebuttal Letter''). On May 18, 2012, FINRA filed a supplementary 
response to additional comments (``Supplementary Rebuttal Letter''). 
See Letter from Stan Macel, FINRA, dated May 18, 2012. The text of 
proposed Amendment No. 2, the Rebuttal Letter, and the Supplementary 
Rebuttal Letter are available on FINRA's Web site at http://www.finra.org, at the principal office of FINRA, and at the 
Commission's Public Reference Room. FINRA's Rebuttal Letter and 
Supplementary Rebuttal Letter are also available on the Commission's 
Web site at www.sec.gov.
    \10\ In Amendment No. 3, FINRA made clear that proposed Rule 
5123 would require members to file with FINRA within 15 calendar 
days of the date of first sale the original offering documents as 
well as any ``materially amended versions'' of offering documents 
used in connection with a sale. The text of proposed Amendment No. 3 
is available on FINRA's Web site at http://www.finra.org, at the 
principal office of FINRA, and at the Commission's Public Reference 
Room.
---------------------------------------------------------------------------

II. Description of Original Proposal, Comments, and Amendment No. 1

A. Description of Original Proposal

    The Original Proposal would have required that members and 
associated persons that offer or sell any applicable private placement 
(``Covered Offering''), or participate in the preparation of a private 
placement memorandum (``PPM''), term sheet, or other disclosure 
document in connection with any Covered Offering, disclose to each 
investor prior to sale the anticipated use of offering proceeds, and 
the amount and type of offering expenses and offering compensation. If 
any issuer's disclosure documents did not contain the requisite 
information, the Original Proposal would have required the member to 
create and provide to any potential investor a separate disclosure 
document containing this information.
    The Original Proposal also would have required that each 
participating member file the PPM, term sheet, or other disclosure 
document, and any exhibits thereto, with FINRA no later than 15 
calendar days after the date of the first sale. In addition, the 
Original Proposal would have required any material amendments to such 
disclosure document, or any amendments to any mandated disclosures 
described in the Original Proposal, to be filed with FINRA no later 
than 15 calendar days after the date such document was provided to any 
prospective investor.

B. Comments on the Original Proposal

    As stated above, the Commission received sixteen comment letters on 
the Original Proposal. Some commenters expressed support for the goals 
of the Original Proposal.\11\ Other commenters, including some who 
supported the proposal, expressed concerns about the Original 
Proposal.\12\
---------------------------------------------------------------------------

    \11\ The Cornell-November Letter viewed the Original Proposal as 
an important step in protecting investors by informing them of the 
risks associated with private placements; the FSI Letter generally 
supported the Original Proposal because it would provide an enhanced 
level of disclosure to investors participating in private placements 
of securities; the NASAA-November Letter generally supported FINRA's 
efforts to increase the disclosure of information pertinent to the 
offer and sale of private placements; the PIABA Letter stated its 
support for the Original Proposal; the St. John's Letter supported 
the Original Proposal in the interest of investor protection, 
increased transparency, and awareness.
    \12\ The NASAA Letter recommended that the Original Proposal 
require members to provide additional risk disclosures to investors; 
the Cornell-November Letter urged FINRA to amend the Original 
Proposal to require a member to disclose any affiliation between the 
issuer and the member; the PIABA Letter sought clarification that 
the Original Proposal would not create a safe harbor for broker-
dealers; the FSI Letter recommended that FINRA adopt an amendment to 
allow one member to make the notice filing on behalf of all members 
of a selling group.
---------------------------------------------------------------------------

    The commenters' concerns generally fell into broad categories: 
Several commenters advocated for additional exemptions to the proposed 
rule (e.g., offerings made by a private fund,\13\ secondary market 
transactions exempt from registration under the Securities Act,\14\ and 
offerings sold to ``knowledgeable employees'' of a private fund or of 
the investment adviser that sponsors or manages a private fund \15\). 
At least one commenter viewed the Original Proposal as exceeding the 
scope of FINRA's regulatory authority.\16\ Several commenters expressed 
concern about the costs and burdens related to the Original Proposal 
(e.g., increased risk of liability for FINRA members required to create 
an offering document,\17\ additional monetary costs associated with 
requiring each FINRA selling group member to provide to each 
prospective investor a copy of the offering document,\18\ and the 
potential negative impact on the availability of capital to certain 
hedge funds \19\).
---------------------------------------------------------------------------

    \13\ See, e.g., MFA-February Letter.
    \14\ See, e.g., ABA Letter.
    \15\ See, e.g., K&L Gates Letter.
    \16\ See, e.g., ABA Letter.
    \17\ See, e.g., REISA-February Letter.
    \18\ See, e.g., NYC Bar November Letter.
    \19\ See, e.g., NSCP Letter.
---------------------------------------------------------------------------

    In response to commenters, FINRA submitted its Response Letter and 
filed Amendment No. 1 to the Original Proposal.\20\
---------------------------------------------------------------------------

    \20\ FINRA subsequently submitted a second letter (i.e., the 
Rebuttal Letter, supra note 9) and amended the Original Proposal 
three times (i.e., Amendments No. 1, No. 2 and No. 3 (discussed in 
Part III, below)). The changes proposed in Amendment No. 1 (along 
with the explanations found in the Response Letter, supra note 6 and 
in the Notice and Proceedings Order, supra note 7) addressed the 
concerns commenters raised in response to the Original Proposal. The 
Commission is therefore not fully discussing the comments to the 
Original Proposal in this Order.
---------------------------------------------------------------------------

C. Description of Amendment No. 1

    Amendment No. 1 made the following changes to the Original 
Proposal:
    First, FINRA amended the Original Proposal by clarifying that the 
term ``private placement'' would have the same meaning as it does in 
Rule 5122. That is, the term private placement would mean ``a non-
public offering of securities conducted in reliance on an available 
exemption from registration under the Securities Act.''
    Second, FINRA amended the Original Proposal by eliminating a 
member's obligation to create a disclosure document. In particular, 
FINRA eliminated the proposed requirement to create and provide to any 
potential investor a separate disclosure document containing the 
anticipated use of offering proceeds, the amount and type of offering 
expenses, and the amount and type of compensation provided or to be 
provided to sponsors, finders, consultants, and members and their 
associated persons in connection with the offering, if a disclosure 
document containing this information, drafted by or on behalf of the 
issuer, did not already exist.
    Third, FINRA amended the Original Proposal by revising a member's 
obligation to make a notice filing with FINRA with respect to a Covered 
Offering. In particular, a member would still be obligated to file with 
FINRA any disclosure document used in the Covered Offering containing 
the requisite information about proceeds, expenses, and compensation; 
however, if no such disclosure document existed, the member would not 
be required to generate a notice document containing the requisite 
information. Instead, the participating member would have to prepare a 
notice filing identifying the private placement, the participating 
members, and stating that no disclosure document was used, and file it 
with FINRA no later than 15 calendar days after the date of first sale.
    Amendment No. 1 also affirmed that proposed Rule 5123 would not 
preclude sales of Covered Offerings in which no disclosure documents 
were used and would not require the member to make any additional 
disclosure to investors in such offerings. In addition, Amendment No. 1 
clarified that each member participating in an offering (or a member's 
designee) would be required to file the disclosure document of notice 
filing with FINRA no later than 15 calendar days after the date of 
first sale.
    Fourth, Amendment No. 1 amended the Original Proposal by clarifying 
certain proposed exemptions from and adding new proposed exemptions to 
the Original Proposal.\21\ The Amendment

[[Page 35459]]

clarified that a member qualifies for an exemption based upon the sales 
it makes rather than those of all members participating in the 
offering. Thus, the actions of one member would not affect the 
availability of an exemption for another member.
---------------------------------------------------------------------------

    \21\ Amendment No. 1 amended the Original Proposal to exclude 
offerings pursuant to the following provisions: Securities Act 
Sections 4(1), 4(3), and 4(4) (which generally exempt secondary 
transactions); Securities Act Sections 3(a)(2) (offerings by banks), 
3(a)(9) (exchange transactions with an existing holder, where no one 
is paid to solicit the exchange), 3(a)(10) (securities subject to a 
fairness hearing), 3(a)(12) (securities issued by a bank or bank 
holding company pursuant to reorganization or similar transactions); 
and Section 1145 of the Bankruptcy Code (securities issued in a 
court-approved reorganization plan that are not otherwise entitled 
to the exemption from registration afforded by Securities Act 
Section 3(a)(10)).
---------------------------------------------------------------------------

    Fifth, Amendment No. 1 made two additional clarifications. 
Amendment No. 1 clarified that the term ``affiliate'' for purposes of 
Rule 5123 would have the same meaning as in FINRA Rule 5121. 
Specifically, the term ``affiliate'' would mean ``an entity that 
controls, is controlled by or is under common control with a member.'' 
Finally, Amendment No.1 clarified that a member would only be required 
to deliver a disclosure document to persons to whom it sells shares in 
the private placement.

III. Description of Comments on Amendment No. 1, FINRA's Rebuttal, and 
Amendments No. 2 and No. 3

A. Comments on Amendment No. 1

    In its Notice and Proceedings Order, the Commission asked that 
commenters address, among other things, the changes that FINRA proposed 
in Amendment No. 1, the comments received on the Notice of Filing, and 
FINRA's Response Letter. In addition, the Commission expressly 
requested comment on the following aspects of the proposed rule change: 
(1) The categories of offerings that would be subject to the proposed 
rule change under the proposed definition of ``private placement;'' (2) 
the potential impact on investors purchasing private placement 
securities through a broker-dealer subject to the proposed rule change; 
(3) the potential impact on members of having to comply with the 
proposed rule change; and (4) the potential impact of competition and 
capital formation, including: (a) Whether members would continue to 
participate in private placements subject to the proposed rule change; 
(b) whether the proposed rule change would encourage issuers to utilize 
unregistered firms to effect their covered offerings; and (c) whether 
the proposed rule change would affect access to capital, the costs of 
capital raising, or the cost of capital for issuers.\22\
---------------------------------------------------------------------------

    \22\ Supra note 7.
---------------------------------------------------------------------------

    The Commission received eleven (11) comment letters in response to 
the Notice and Proceedings Order,\23\ including four (4) letters 
supporting the proposed rule \24\ and seven (7) letters requesting 
requested significant changes.\25\
---------------------------------------------------------------------------

    \23\ Supra note 8.
    \24\ S&C--February Letter; NYC Bar--February Letter; Cornell--
February Letter; NASAA--April Letter.
    \25\ St. Charles Letter; Monument Group--February Letter; MFA--
February Letter; Martin Letter; NIBA Letter; REISA--February Letter.
---------------------------------------------------------------------------

1. Favorable Comments
    The S&C-February Letter commended FINRA for the amendment and 
stated its belief that members would be able to comply with the 
narrowly tailored disclosure requirements. The NYC Bar-February Letter 
stated that FINRA substantially responded to its comments and it 
therefore supported the rule. The Cornell-February Letter stated that 
it supported the proposed rule as amended and that the costs of 
compliance would be minimal. The Cornell-February Letter and the NYC 
Bar-February Letter stated that the proposed rule change would have a 
beneficial impact on investors and investor protection. Although the 
NASAA-April Letter stated that NASAA continued to support the rule, 
NASAA expressed opposition to the amendment, saying that the amendment 
weakened the protection of investors as compared to the Original 
Proposal.\26\
---------------------------------------------------------------------------

    \26\ NASAA--April Letter.
---------------------------------------------------------------------------

2. General Compliance and Other Concerns
    The Rutledge Letter recommended that FINRA adopt a uniform template 
for its notice filing. Specifically, the Rutledge Letter recommended 
that the proposed rule change specify that a member would be required 
to file an issuer's Form D to satisfy its filing obligation.\27\ FINRA 
did not adopt this approach, stating that the information contained in 
an issuer's Form D does not fully address the informational needs of 
FINRA with respect to oversight of its members' activities regarding 
private placements, and thus is not a viable alternative to the 
proposed rule change.
---------------------------------------------------------------------------

    \27\ ``Form D'' is a notice filing an issuer makes to the 
Commission and any requisite states after the issuer first sells its 
securities in reliance on an exemption under Regulation D or Section 
4(5) of the Securities Act. Form D generally includes the names and 
addresses of the company's executive officers and stock promoters, 
but contains little other information about the company.
---------------------------------------------------------------------------

    The Martin Letter stated that proposed Rule 5123 should clarify how 
a member would comply if the member does not sign a selling agreement 
until more than 15 days have passed after the first sale. FINRA noted 
in its Rebuttal Letter that the proposed filing requirement referred to 
the first sale by the member making the filing (or on whose behalf a 
designated member is filing), rather than the first sale by another 
member.
    The NIBA Letter and REISA--February Letter suggested that members 
be provided access to summary information collected by FINRA regarding 
private placements as a result of the proposed rule change. FINRA 
responded in its Response Letter and repeated in its Rebuttal Letter 
that, by the express terms of the proposed rule change, this 
information would be collected solely for regulatory purposes and FINRA 
intends to provide confidential treatment to all documents and 
information filed pursuant to it. In fact, the proposed rule would 
contain a provision addressing confidential treatment of any 
information filed with FINRA pursuant to the proposed rule. 
Specifically, pursuant to proposed paragraph 5123(c), FINRA would 
accord confidential treatment to all documents and information filed 
pursuant to the Rule, and would use such documents and information 
solely for the purpose of determining compliance with FINRA rules or 
other applicable regulatory purposes.
    These two commenters also sought clarification about the liability 
of members for violations of the proposed rule.\28\ FINRA stated in its 
Response Letter that a wide range of regulatory responses is available 
for violations of the proposed rule, as there is for violations of any 
FINRA rule. FINRA stated that its regulatory response would depend on 
the facts and circumstances of the violation in question. FINRA also 
noted that any sanction it imposes in any matter is also subject to 
oversight and review by the Commission.\29\
---------------------------------------------------------------------------

    \28\ NIBA Letter; REISA-February Letter.
    \29\ See, e.g., FINRA Rule 9370 (Application to SEC for Review).
---------------------------------------------------------------------------

3. Exemptions
    Several commenters requested additional exemptions from coverage 
under Rule 5123. The S&C--February Letter, for example, requested an 
exemption for all accredited investors. FINRA stated that it does not 
believe that the exemption should extend to offers to accredited 
investors under Rule 501(a)(4), (5), or (6) of Regulation D. In 
particular, FINRA stated that it believes

[[Page 35460]]

that the criteria used to measure whether a person meets the accredited 
investor standard do not necessary reflect a sufficiently high level of 
sophistication to justify exemption from the proposed rule.
    The NIBA Letter and REISA-February Letter expressed concern about 
the exemption for institutional accounts as amended by Amendment No. 1. 
Specifically, Amendment No. 1 proposed exempting from coverage, 
offerings sold by a member or person associated with the member solely 
to institutional accounts as defined by new FINRA Rule 4512(c). Those 
commenters stated that the proposed exemption is confusing because the 
definition used in FINRA Rule 4512(c)(1)(A) uses a different set of 
monetary thresholds than those used for the definitions of Qualified 
Institutional Buyers (``QIBs'') in Section 144A of the Securities Act 
and Qualified Purchasers (``QPs'') in Section 2(a)(51)(A) of the 
Investment Company Act. FINRA noted in its Rebuttal Letter that 
proposed Rule 5123 would exempt offerings sold to all three of these 
categories of purchasers--institutional accounts as defined in FINRA 
Rule 4512(c), QIBs, and QPs. Because the categories provide cumulative 
relief to members, FINRA stated that it did not believe that offering 
more exemptions, including an additional, stand-alone exemption with 
different criteria would be confusing.
    The St. Charles Letter requested that FINRA include an exemption 
for firms engaged solely in advisory services, e.g., firms that assist 
with the preparation of the PPM. In its Rebuttal Letter, FINRA stated 
that Amendment No. 1 eliminated from the Original Proposal the 
application of the proposed rule to firms that assist with the 
preparation of offering documents.
    In addition, the proposed rule would contain a catchall provision 
that would give FINRA discretion to allow for additional exemptions. 
Specifically, pursuant to proposed paragraph 5123(d), FINRA would have 
authority to exempt a member or associated person from the provisions 
of the proposed Rule upon a showing of good cause.
4. Legislative and Regulatory Concerns
    The Rutledge Letter requested that FINRA reevaluate the proposed 
rule change in light of the enactment of the Jumpstart Our Business 
Startups Act of 2012 (``JOBS Act''). In particular, the Rutledge Letter 
suggested that the proposed rule change is inconsistent with the intent 
of the JOBS Act to reduce regulation applicable to small business 
capital formation.\30\ In the Supplementary Rebuttal Letter, FINRA 
stated that it believes that the proposed rule change is consistent 
with the JOBS Act.\31\ In particular, FINRA stated that it believes 
that requiring a member to make a notice filing subsequent to a sale of 
a private placement would not unnecessarily burden members or capital 
formation in light of the intended regulatory benefits to investors of 
the resulting enhanced oversight. FINRA suggested that investor 
confidence would be fostered by the enhanced oversight resulting from 
the proposed rule change and that it would thereby facilitate capital 
formation. FINRA further reiterated its view that that the proposed 
rule change, as amended, would enhance its regulatory oversight of 
broker-dealers that sell securities in the private placement 
market.\32\
---------------------------------------------------------------------------

    \30\ Supra note 8.
    \31\ Supra note 9.
    \32\ Supra note 9.
---------------------------------------------------------------------------

    The Rutledge Letter also stated that the proposed rule is 
unnecessary and suggested FINRA instead enforce existing rules and 
increase sanctions for private placement fraud. FINRA stated that the 
proposed rule change, as amended, would enhance its regulatory 
oversight of broker-dealers that sell securities in the private 
placement market by providing FINRA with more timely and complete 
information about its members' private placement activities.
    The Rutledge Letter suggested an alternative approach to improve 
investor protection in the private placement market. Specifically, the 
Rutledge Letter proposed that the SEC and FINRA adopt additional 
regulations governing finders and business brokers with respect to, 
among other things, licensing, qualifications, recordkeeping, and 
continuing education. FINRA stated that it will examine the need for 
additional rules governing finders and business brokers and work with 
the Commission, as appropriate. FINRA, however, stated that it views 
additional regulation of finders and business brokers as a complement 
to the proposed rule and the enhanced information it would make 
available to FINRA.
    The MFA-February Letter opposed the amended rule stating that it 
believed the rule would be inconsistent with the federal securities 
laws. Although the letter acknowledged that FINRA's proposed rule would 
no longer require the creation and delivery of a disclosure document in 
connection with sales in which no offering document was used, it stated 
that the proposed rule's ongoing requirement to provide any existing 
disclosure document to a prospective investor would substitute FINRA's 
judgment for Congress's, which has enacted and repeatedly reaffirmed a 
statutory framework for private funds that leave matters of disclosure 
to issuers. FINRA responded to these concerns by filing Amendments No. 
2 and No. 3, which eliminated any disclosure requirement and left only 
a filing requirement or a requirement to indicate to FINRA that no 
offering documents were used.
    The Rutledge Letter also asserted that the proposed rule would 
disrupt the established federal securities regulatory scheme because it 
would expand FINRA's jurisdiction to cover issuers of private 
placements. Similarly, the Rutledge Letter claimed that the proposed 
rule change would subject private placements subject to the proposed 
rule change to an implicit approval process. The Rutledge Letter stated 
that inserting an additional layer of regulatory review would impede 
capital formation. FINRA responded that it believes the proposed rule 
change is consistent with its jurisdiction over members and persons 
associated with members. Moreover, FINRA represented in the Original 
Proposal and in the Supplementary Rebuttal Letter that the proposed 
notice filing requirement does not establish any review and approval 
process by FINRA for private placements.\33\
---------------------------------------------------------------------------

    \33\ See Original Proposal, supra, note 4 and Supplementary 
Rebuttal Letter, supra, note 9.
---------------------------------------------------------------------------

    The NIBA Letter stated that the additional burden that would be 
imposed on FINRA members by the proposed rule would cause issuers to 
rely on unregistered entities or themselves to conduct the types of 
offerings covered by the rule. Thus, NIBA argued that FINRA can only 
partially address the problems in this area unless the Commission also 
adopts rules applicable to issuers and unregulated persons, who provide 
essentially the same services as FINRA members.
    In the Rebuttal Letter, FINRA stated that it generally supports 
broader oversight of private placements and stated that improvement in 
the protection of broker-dealer customers should not depend upon 
whether the Commission adopts rules for issuers and entities not 
subject to FINRA's oversight. Moreover, by amending the filing in 
Amendments No. 2 and No. 3 to require only either a notice filing of 
the offering documents that were used or a statement that no such 
documents

[[Page 35461]]

were used, as FINRA stated in the Original Proposal and in the 
Supplementary Rebuttal Letter, there should be no implication that the 
FINRA staff would comment on a filing; that a filing need occur prior 
to making an offering; or that members should expect FINRA staff input 
before proceeding with an offering.
5. Costs and Burdens
    The Cornell-February Letter and NYC Bar-February Letter both stated 
that the proposed rule change would not impose unnecessary burdens on 
capital formation or have unequal competitive impact. Other commenters, 
however, raised concerns regarding burdens on capital formation and 
effect on competition. For example, the REISA-February Letter and the 
NIBA Letter stated that the proposed rule would unduly burden 
independent broker-dealers participating in offerings of $50 million or 
less. The NIBA Letter asserted that the amended proposed rule would 
adversely affect small firms, small issuers, and small businesses more 
directly than large and medium sized firms, because those larger firms 
do not participate in offerings of under $50 million in retail private 
placements for small or newer issuers. The Monument Group-February 
Letter opposed the amended rule stating that it believed it would 
impede capital formation by placing ``anticompetitive'' burdens on 
small private placement agents. The MFA-February Letter opposed the 
amended rule stating, among other things, that it believed the rule 
would be burdensome and costly, would impede capital formation, and 
would reduce efficiency.
    In its Rebuttal Letter, FINRA stated that it has responded to these 
concerns by filing Amendment No. 2 which amended the proposed rule to 
minimize the potential burden: by (1) Eliminating any disclosure 
requirement; and (2) narrowly tailoring the remaining notice filing 
requirement (See Section III.B. below). FINRA asserted in its Response 
Letter and Rebuttal Letter that a requirement to make a notice filing 
after the offering has commenced and sales have occurred would not 
impose an unnecessary burden on members or capital formation and would 
be appropriate in light of the intended regulatory benefits for 
investors that would flow from enhanced oversight of, among other 
things, members' compliance obligations, such as their suitability 
obligations.\34\
---------------------------------------------------------------------------

    \34\ FINRA noted that members have an obligation under NASD Rule 
2310 to conduct a robust and thorough suitability analysis before 
recommending securities in a private placement. FINRA stated that 
this analysis requires a reasonable investigation into the offering 
and understanding of its features, including fees and expenses and 
use of proceeds. Specifically, FINRA stated that Regulatory Notice 
10-22, dated April 2010, provides that a member's reasonable 
investigation must be tailored to each Regulation D offering in a 
manner that best ensures that it meets its regulatory 
responsibilities. The Regulatory Notice sets out lists of best 
practices in investigations focusing on the issuer and its 
management, the issuer's business prospects and the issuer's assets.
---------------------------------------------------------------------------

    FINRA further stated that it believes the filing requirement of 
proposed Rule 5123 would provide FINRA with timely and detailed 
information about the private placement activities of its member firms 
that would enhance its oversight functions. Specifically, FINRA stated 
that it believes that information obtained through compliance with the 
proposed rule would assist its efforts to identify problematic terms 
and conditions in private placements, thereby helping to detect and 
prevent fraud in connection with private placements.
    In sum, FINRA stated that it does not believe that the proposed 
rule change would result in any burden on competition that is not 
necessary or appropriate in furtherance of the purposes of the Act. And 
FINRA stated that it believes that the ``relatively modest burden'' of 
the proposed rule change is both necessary and appropriate in helping 
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.

B. Description of Amendments No. 2 and No. 3

    In response to comments, FINRA filed two subsequent Amendments to 
the proposed rule, discussed below.
    In Amendment No. 2, FINRA eliminated the requirement in proposed 
Rule 5123 that firms provide specified disclosures to investors. As a 
result, proposed Rule 5123(a) would contain only a filing requirement. 
Specifically, paragraph (a) would require each member that sells a 
security in a Covered Offering to: (i) Submit to FINRA, or have 
submitted on its behalf by a designated member, a copy of any PPM, term 
sheet, or other offering document used in connection with such sale 
within 15 calendar days of the date of first sale, as well as any 
material amendments to a previously-filed document within 15 calendar 
days of the date such document is provided to any investor; or (ii) 
indicate to FINRA that no such offering documents were used.
    In Amendment No. 2, FINRA, responding to comments on the exemption 
for employees and affiliates, also proposed adding a cross-reference to 
the definition of ``affiliate'' in proposed Rule 5121(b)(1)(G). And 
FINRA proposed deleting the supplementary material that was proposed in 
Amendment No. 1.\35\
---------------------------------------------------------------------------

    \35\ The Proposed Supplementary Material .01 contained a 
definition of ``affiliate'' that would have noted that the term had 
the same meaning as in FINRA Rule 5121. This concept was moved to 
the body of the rule, which now incorporates the definition 
affiliates from Rule 5121 by reference. Proposed Supplementary 
Material .02 expanded on the compliance obligations for the 
disclosure requirement but is no longer necessary because the 
disclosure obligation that was contained in Rule 5123 was deleted.
---------------------------------------------------------------------------

    In Amendment No. 3, FINRA proposed a further clarifying technical 
amendment to paragraph (a) of proposed Rule 5123. Specifically, FINRA 
proposed to clarify that a FINRA member must file with FINRA not only 
the original offering documents but also any ``materially amended 
versions'' of offering documents used in connection with a sale within 
15 calendar days of the date of first sale.
    As noted above, FINRA stated its belief that these changes to the 
proposed rule would address concerns raised by the industry in the 
comment process, would provide important investor protections in 
connection with private placements of securities, and are in the public 
interest.\36\ FINRA stated that it generally supports broader oversight 
of private placements and stated that improvement in the protection of 
broker-dealer customers should not depend upon whether the Commission, 
itself, adopts rules for issuers and entities not subject to FINRA's 
oversight. FINRA further stated that it believes that the proposed rule 
change is consistent with the provisions of Section 15A(b)(6) of the 
Act,\37\ 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.
---------------------------------------------------------------------------

    \36\ See Rebuttal Letter.
    \37\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

IV. General Commission Findings

    After carefully reviewing the proposed rule change, as amended, the 
comments received, and FINRA's response to comments, the Commission 
finds that the proposed rule change is consistent with the requirements 
of the Act and the rules and regulations thereunder applicable to a 
national securities association. In particular, the

[[Page 35462]]

Commission finds that the proposed rule change is consistent with 
Section 15A(b)(6) of the Act,\38\ which, among other things, requires 
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. In 
approving the proposed rule change, the Commission has also considered 
the rule change's impact on efficiency, competition, and capital 
formation.\39\
---------------------------------------------------------------------------

    \38\ 15 U.S.C. 78o-3(b)(6).
    \39\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    As discussed above, the Commission believes that FINRA has 
addressed capital formation, competition, and efficiency concerns. In 
Amendments No. 2 and No. 3, FINRA minimized any potential inefficiency 
to, or burden on, members by: (1) Eliminating any disclosure 
requirements; and (2) narrowly tailoring the rule to require either a 
notice filing of the offering documents that were used within 15 
calendar days of the date of first sale or provide a statement that no 
such documents were used. Furthermore, in response to comments, FINRA 
created additional exemptions to coverage under Rule 5123. In addition, 
FINRA noted in its Rebuttal Letter and its Supplementary Rebuttal 
Letter that it believes that a requirement to make a notice filing 
after the offering has commenced and sales have occurred would not 
impose any unnecessary burdens on capital formation. FINRA stated that 
it would use the information it receives pursuant to the proposed new 
rule, to further its detection and prevention of fraudulent and 
manipulative acts and practices, and to promote just and equitable 
principles of trade, all in the interest of enhancing the protection of 
investors. The Commission believes that FINRA narrowly tailored a 
broker-dealer's obligations under Rule 5123, while enhancing its 
ability to carry out its statutory obligations to oversee member firms. 
The Commission points to the discussion above which highlights the many 
revisions FINRA made to the proposal to address comments and concerns 
raised through three separate opportunities for comment.

V. Accelerated Approval

    The Commission finds goods cause, pursuant to Section 19(b)(2) of 
the Exchange Act,\40\ for approving the proposed rule change, as 
modified by Amendments No. 1, No. 2, and No. 3, and prior to the 30th 
day after publication of notice of the filing of Amendments No. 2 and 
No. 3 in the Federal Register. The proposed rule change was informed by 
FINRA's consideration of, and the incorporation of many suggestions 
made in comments on a 2011 proposal to members to expand Rule 5122,\41\ 
the Notice of Filing,\42\ and the Notice and Proceedings Order.\43\ 
Amendments No. 1, No. 2, and No. 3 reflect FINRA's efforts to further 
address commenter concerns and minimize burdens resulting from the 
proposed rule's requirements.
---------------------------------------------------------------------------

    \40\ 15 U.S.C. 78s(b)(2).
    \41\ Supra note 3.
    \42\ Supra note 4.
    \43\ Supra note 7.
---------------------------------------------------------------------------

    Accordingly, the Commission finds that good cause exists to approve 
the proposal, as modified by Amendments No. 1, No. 2, and No. 3, on an 
accelerated basis.

VI. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed 
rules change as amended by Amendments No. 2 and No. 3 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-2011-057 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2011-057. 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 Web site (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 Web site 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; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FINRA-2011-057 and should be 
submitted on or before July 5, 2012.

VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\44\ that the proposed rule change (SR-FINRA-2011-057), as amended 
by Amendments No. 1, No. 2, and No. 3, be, and hereby is, approved on 
an accelerated basis.
---------------------------------------------------------------------------

    \44\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\45\
---------------------------------------------------------------------------

    \45\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-14340 Filed 6-12-12; 8:45 am]
BILLING CODE 8011-01-P