Document ID: SEC-2021-0200-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2021-02-10T05:00Z

[Federal Register Volume 86, Number 26 (Wednesday, February 10, 2021)]
[Notices]
[Pages 8970-8972]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-02715]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91066; File No. SR-FINRA-2020-038]

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

February 4, 2021.

I. Introduction

    On October 28, 2020, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change SR-FINRA-2020-038 (``Proposed 
Rule Change'') pursuant to Section 19(b)(1) of the Securities Exchange 
Act of 1934

[[Page 8971]]

(``Exchange Act'') \1\ and Rule 19b-4 \2\ thereunder to amend FINRA 
Rules 5122 (Private Placements of Securities Issued by Members) and 
5123 (Private Placements of Securities) to require members to file 
retail communications concerning private placement offerings that are 
subject to those rules' filing requirements.\3\ The Proposed Rule 
Change was published for public comment in the Federal Register on 
November 6, 2020.\4\ On December 11, 2020, FINRA consented to an 
extension of the time period in which the Commission must approve the 
Proposed Rule Change, disapprove the Proposed Rule Change, or institute 
proceedings to determine whether to approve or disapprove the Proposed 
Rule Change to February 4, 2021.\5\ On January 12, 2021, FINRA filed an 
amendment to modify the Proposed Rule Change (``Amendment No. 1'').\6\ 
The Commission is publishing this order pursuant to Section 19(b)(2)(B) 
of the Exchange Act \7\ to solicit comments on Amendment No. 1 from 
interested persons and to institute proceedings to determine whether to 
approve or disapprove the Proposed Rule Change, as modified by 
Amendment No.1 (``Amended Proposed Rule Change'').
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See infra note 4.
    \4\ See Exchange Act Release No. 90302 (Nov. 2, 2020), 85 FR 
71120 (Nov. 6, 2020) (File No. SR-FINRA-2020-038) (``Notice'').
    \5\ See letter from Joseph Savage, Vice President, Office of 
General Counsel Regulatory Policy, FINRA, to Daniel Fisher, Branch 
Chief, Division of Trading and Markets, Commission, dated December 
11, 2020.
    \6\ Amendment No. 1 is available at https://www.finra.org/sites/default/files/2021-01/SR-FINRA-2020-038-Amendment1.pdf.
    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Amended Proposed Rule Change

    For certain private placements of unregistered securities issued by 
a FINRA member or a control entity \8\ (``member private offerings''), 
FINRA Rule 5122 requires the member or control entity to provide 
prospective investors \9\ with a private placement memorandum 
(``PPM''), term sheet or other offering document that discloses the 
intended use of the offering proceeds, the offering expenses and the 
amount of selling compensation that will be paid to the member and its 
associated persons. Among other things, the current rule also requires 
a member to file the PPM, term sheet or other offering document with 
the FINRA Corporate Financing Department at or prior to the first time 
the document is provided to any prospective investor, as well as any 
amendments to such documents within 10 days of being provided to any 
investor or prospective investor.\10\ Similarly, for certain private 
placements \11\ of unregistered securities issued by a non-member, 
FINRA Rule 5123 requires members or control persons to file with FINRA 
any PPM, term sheet or other offering document,\12\ including any 
material amended versions thereof, used in connection with an offering 
within 15 calendar days of the date of first sale.
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    \8\ A ``control entity'' means any entity that controls or is 
under common control with a member, or that is controlled by a 
member or its associated persons. See FINRA Rule 5122(a)(2)-(3); see 
also Notice at note 3.
    \9\ Because of the types of private placements exempt from the 
application of Rule 5122, FINRA believes that the rule applies 
predominately to private placements sold to retail investors. See 
Notice at 71121.
    \10\ See Notice at 71120.
    \11\ See supra note 9.
    \12\ Rules 5122 and 5123 do not enumerate the types of 
information that might be considered ``other offering documents.'' 
However, FINRA has stated previously that an example of ``other 
offering document'' is ``[a]ny other type of document that sets 
forth the terms of the offering.'' See ``Frequently Asked Questions 
(FAQ) About Private Placements,'' Question #10, available on 
www.finra.org. The terms of an offering include facts such as the 
amount of proceeds that the issuer intends to raise, the type of 
security, descriptions or illustrations of the intended use of 
proceeds, and explanations of tax benefits or other information that 
would be relevant to an investor when deciding whether to make an 
investment. See Notice at 71121.
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    FINRA proposes amendments to Rules 5122 and 5123 to require members 
or control persons to file private placement retail communications \13\ 
with FINRA, in addition to the currently required PPMs, term sheets, 
and other offering documents. Specifically, the Amended Proposed Rule 
Change would require members or control persons to file with the FINRA 
Corporate Financing Department at, or prior to, the first time the 
document is provided to any prospective investor, any retail 
communication that ``promotes or recommends'' a private placement, 
rather than any retail communication that ``concerns'' a private 
placement, as originally proposed.\14\
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    \13\ Rule 2210(a)(5) defines a ``retail communication'' as any 
written (including electronic) communication that is distributed or 
made available to more than 25 retail investors within any 30 
calendar-day period. See Regulatory Notice 20-21 (July 2020) 
(stating that a member firm that assists in the preparation of a 
private placement memorandum or other offering document should 
expect that it will be considered a communication with the public by 
that member firm for purposes of Rule 2210 (Communications with the 
Public)); see also letter from Joseph P. Savage, Vice President and 
Counsel, Office of General Counsel, FINRA, to Vanessa Countryman, 
Secretary, Commission, dated January 12, 2021, available at https://www.sec.gov/comments/sr-finra-2020-038/srfinra2020038-8233135-227749.pdf.
    \14\ Specifically, Amendment No. 1 would limit the filing 
requirement of the Proposed Rule Change to those retail 
communications that ``promote or recommend'' a private placement, 
rather than any retail communication that ``concerns'' a private 
placement, as originally proposed.
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III. Proceedings To Determine Whether To Approve or Disapprove File No. 
SR-FINRA-2020-038 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Exchange Act to determine whether the Amended 
Proposed Rule Change should be approved or disapproved.\15\ Institution 
of proceedings is appropriate at this time in view of the legal and 
policy issues raised by the Amended Proposed Rule Change. Institution 
of proceedings does not indicate that the Commission has reached any 
conclusions with respect to the Amended Proposed Rule Change.
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    \15\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Exchange Act,\16\ the 
Commission is providing notice of the grounds for disapproval under 
consideration. The Commission is instituting proceedings to allow for 
additional analysis and input concerning whether the Amended Proposed 
Rule Change is consistent with the Exchange Act and the rules 
thereunder.
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    \16\ Id.
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IV. Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the Amended Proposed Rule Change. Specifically, the Commission is 
requesting comment on whether the Amended Proposed Rule Change 
adequately addresses commenters' concerns regarding the scope of the 
proposed filing requirement in light of the regulatory goals of 
improving the quality of broker-dealer private placement communications 
and strengthening FINRA's ability to monitor for potential violations 
of its rules governing members' communications with the public. In 
particular, the Commission invites the written views of interested 
persons concerning whether the Amended Proposed Rule Change is 
consistent with the Exchange Act and the rules thereunder.
    Although there do not appear to be any issues relevant to approval 
or

[[Page 8972]]

disapproval that would be facilitated by an oral presentation of views, 
data, and arguments, the Commission will consider, pursuant to Rule 
19b-4, any request for an opportunity to make an oral presentation.\17\
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    \17\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Public Law 94-29, 89 Stat. 97 (1975), 
grants the Commission flexibility to determine what type of 
proceeding--either oral or notice and opportunity for written 
comments--is appropriate for consideration of a particular proposal 
by a self-regulatory organization. See Securities Acts Amendments of 
1975, Report of the Senate Committee on Banking, Housing and Urban 
Affairs to Accompany S. 249, S. Rep. No. 75, 94th Cong., 1st Sess. 
30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the Amended Proposed Rule Change should be 
approved or disapproved by February 24, 2021. Any person who wishes to 
file a rebuttal to any other person's submission must file that 
rebuttal by March 8, 2021.
    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 No. SR-FINRA-2020-038 on the subject line.

Paper Comments

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

All submissions should refer to File No. SR-FINRA-2020-038. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the Amended Proposed Rule Change that are 
filed with the Commission, and all written communications relating to 
the Amended 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 such filing also will be 
available for inspection and copying at the principal office of FINRA.
    All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly.
    All submissions should refer to File No. SR-FINRA-2020-038 and 
should be submitted on or before February 24, 2021. If comments are 
received, any rebuttal comments should be submitted on or before March 
8, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-02715 Filed 2-9-21; 8:45 am]
BILLING CODE 8011-01-P