New Proposals To Amend FINRA Rule 5110

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On January 9, 2014, FINRA submitted proposals to the SEC to amend FINRA Rule 5110. FINRA’s proposals seek to:

(i) narrow the definition of “participation or participating in a public offering;”

(ii) modify the lock-up restrictions to exclude certain securities acquired or converted to prevent dilution to stockholders; and

(iii) clarify that the information requirements are applicable only to relationships with a “participating” FINRA member. The proposals also included an amendment to Rule 5121 to narrow the scope of the definition of “control.” The SEC is soliciting comments to FINRA’s proposals. Comments are due 21 days after publication of the proposals in the Federal Register.

Participation in a Public Offering

FINRA Rule 5110 regulates underwriting compensation and arrangements including items of value and other arrangements with FINRA members that are “participating” in a public offering of an issuer’s securities. The proposals amend the definition of “participation or participating in a public offering” to exclude members which provide “advisory or consulting services to the issuer and is neither engaged in, nor affiliated with any entity that is engaged in, the solicitation or distribution of the offering.” FINRA explained in the proposals that this would allow FINRA members to advise issuers on matters such as financing options, benefits and disadvantages of a public offering and offering terms being proposed by an underwriter. As proposed, if a FINRA member engages in any solicitation or distribution activities in connection with a public offering, then the compensation paid to the member, including for any advisory or consulting services, would become subject to FINRA’s compensation limitations set forth in Rule 5110.

Lock-Up Restrictions.

FINRA Rule 5110(g) requires a 180-day lock-up restriction on underwriters. The restriction bars them from selling securities acquired in the period beginning 180 days before the initial filing of the registration statement with FINRA. This restriction includes securities that are excluded from underwriter compensation pursuant to Rule 5110(d)(5). FINRA’s proposals would remove the lock-up restriction from the category of securities owned by a FINRA member due to “acquisitions and conversions to prevent dilution.” FINRA noted that Rule 5110(d)(5) requires as a condition to the exclusion that the securities have been provided to all similarly situated security holders, and that the receipt of these additional securities did not increase the recipient’s percentage of ownership of the same class of the issuer’s securities. FINRA stated that locking up such securities thus does not provide useful protection. Its proposals request the removal of lock-up restrictions for securities received in a transaction excluded by Rule 5110(d)(5) in order to remove unnecessary burdens on member firms to track and monitor compliance with the lock-up provisions.

Information Requirements.

The FINRA proposals seek to amend Rule 5110(b)(6)(A)(iii) to require disclosure of affiliations or associations that officers, directors or certain owners of the issuer have with only “participating members”. FINRA explained that that affiliations with non-participating members do not present the concerns that Rule 5110 is meant to address such as whether members are in a position to negotiate unreasonable underwriting terms.

Definition of “Control.”

FINRA’s proposals include an amendment to the definition of “control” as defined by Rule 5121(f)(6). The proposed definition would exclude beneficial ownership of 10 percent or more of the outstanding subordinated debt of an entity. FINRA stated that ownership of 10 percent or more of an issuer’s outstanding subordinated debt is not a meaningful measure of control or affiliation. FINRA’s proposed definition reduces the information required to be reported by members.

For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit   This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
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Boca Raton, Florida 33432
Telephone: (561) 416-8956
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