[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]
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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.
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\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'').
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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.
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\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.
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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\
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\6\ See Original Notice, supra note 3, for a complete
description of the proposal as originally filed.
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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.
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\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.
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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\
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\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.
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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.
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\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.
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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\
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\11\ The proposed rule change would also impact an identical
exemption cross referenced in paragraph (b)(2) of FINRA Rule 5131.
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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.
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\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).
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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\
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\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.
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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:
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\14\ See supra note 5.
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[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.
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\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).
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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.
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\16\ Rule 5131(e)(7) defines the term ``new issue'' by reference
to Rule 5130(i)(9).
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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\
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\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).
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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.
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\20\ 15 U.S.C. 78s(b)(2).
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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 [email protected]. 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.
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\21\ Id.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-24494 Filed 11-8-19; 8:45 am]
BILLING CODE 8011-01-P