Proposed Amendment to FINRA Rule 5122 Relative to Broker/Dealer Participation in Private Placements

Broker/Dealer – Private Placements:

As a result of the recent private placement debacle that seems to be discussed daily in the financial press, FINRA has proposed an amendment to its rules, which it believes will enhance investor protection. While the amendment is not the end-all to the problems that have recently been exposed in this area, it is a step in the right direction.

The comment period for a proposed amendment to FINRA Rule 5122, relating to private placements, expires on March 14, 2011. Current Rule 5122 requires, subject to certain exemptions, disclosure in the offering document of the intended use of offering proceeds, expenses, and the amount of selling compensation to be paid to the broker-dealer and its associated persons, in any private placement in which a participating broker-dealer (or its control entity) is the issuer. The rule also requires that at least 85 percent of the offering proceeds must be used for the business purposes identified in the offering document. Lastly, the rule requires each offering document to be submitted to FINRA to allow the staff to conduct ex post reviews to assess compliance with the rule and to identify problematic terms and conditions.

The amendments proposed in this Notice expand Rule 5122 to reach all private placements in which a member firm participates-not just those in which the member firm (or its control entity) is the issuer-while retaining nearly all of the existing exemptions, including those for offerings sold solely to certain institutions, qualified purchasers and other sophisticated investors. However, to reflect the broader scope of the proposed rule and its prior experience with Rule 5122, FINRA proposes to eliminate the exemption for offerings in which a member acts primarily in a wholesaling capacity.

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