FINRA’s proposed Rule 5123, according to SEC documents, “would require that members and associated persons that offer or sell applicable private placements (as described in the Rule), or participate in the preparation of private placement memoranda (“PPM”), term sheets or other disclosure documents in connection with such private placements, provide relevant disclosures to each investor prior to sale describing the anticipated use of offering proceeds, and the amount and type of offering expenses and offering compensation.” The documents associated with the disclosure of the relevant information would be required to “… be filed with FINRA no later than 15 calendar days after the date of the first sale…”

One of the main reasons for this proposed rule change is to protect investors in private placements. According to SEC documentation FINRA is looking to, “ensure that investors in private placements are provided detailed information about the intended use of offering proceeds, the offering expenses and offering compensation.” Investors should be able to know what their capital investment is being used for and how much of it is going into the investment itself versus how much goes to the commission for the financial professional and the fees to execute the transaction. The rule, like any regulation, does contain a laundry list of exemptions, but intends to protect everyday investors.

The North American Securities Administrators Association (NASAA) recently issued a letter to the SEC in which they commented on the proposed FINRA Rule 5123 related to Private Placements. While the NASAA is in support of FINRA’s goal to protect investors by way of better regulation of private placement offerings, they feel that FINRA’s rule does not go far enough. The NASAA “…continues to support a requirement that these securities be subject to substantive regulatory review” and feel that the FINRA proposal “stops short of addressing the issues inherent in unreviewed private placements.”

The NASAA made a series of regulation suggestions in their response to the FINRA Rule 5123 proposal. Among other things, they believe that investors will be inadequately protected until private placements are “substantively reviewed” by regulators. They also would like to require a firm 15% maximum of the offering proceeds that are able to go to costs and compensation for the brokers. This maximum exists in a limited capacity within FINRA Rule 5122, but the NASAA would like to see it expanded. Further, the NASAA also feels that the FINRA proposal does not adequately require those offering private placements to disclose the full risks associated with the investment and has concerns about the extent of the exceptions/exemptions within the proposed rule.

Both the NASAA and FINRA have as goals the protection of investors. It will be interesting to monitor the SEC’s response to both the FINRA proposal and the NASAA’s comments.

The White Law Group often represents investors who are struggling with investments in private placements. If you feel you may be the victim of investment fraud, or are just concerned about a private placement that you invested in, and would like to speak to a securities attorney about your potential to recovery your investment losses please call our Chicago office at 312-238-9650.

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida.

For more information on The White Law Group, please visit our website at http://www.whitesecuritieslaw.com.

These disclosures would provide the investor with a wealth of information about where their money was headed. The information would “include information regarding the amount and type of offering expenses, as well as the amount and type of compensation provided to sponsors, consultants and members in connection with the offering.”

The documents providing this information would have to be provided to FINRA within 15 days of the first sale. Even with the proposed changes, some offerings would not have to follow these new regulations. These exceptions to the rule would appear to be for private placements being offered exclusively to qualified purchasers or qualified institutional buyers.

FINRA’s goal for these proposed rule changes is to protect investors. FINRA was quoted as stating that the changes would, “provide important investor protections in connection with private placements without unduly restricting capital formation through the private placement offering process” and further helping to “identify problematic terms and conditions in private placements, thereby helping to detect and prevent fraud in connection with private placements.”

If you are concerned about an investment you made in a private placement or have questions about FINRA rules and would like to speak to a securities attorney please call our Chicago office at 312-238-9650.

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida.

For more information on The White Law Group, please visit our website at http://www.whitesecuritieslaw.com.

A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.

2020. Use of Manipulative, Deceptive or Other Fraudulent Devices

No member shall effect any transaction in, or induce the purchase or sale of, any security by means of any manipulative, deceptive or other fraudulent device or contrivance.

2060. Use of Information Obtained in Fiduciary Capacity

A member who in the capacity of paying agent, transfer agent, trustee, or in any other similar capacity, has received information as to the ownership of securities, shall under no circumstances make use of such information for the purpose of soliciting purchases, sales or exchanges except at the request and on behalf of the issuer.

2114. Recommendations to Customers in OTC Equity Securities

Preliminary Note: The requirements of this Rule are in addition to other existing member obligations under FINRA rules and the federal securities laws, including obligations to determine suitability of particular securities transactions with customers and to have a reasonable basis for any recommendation made to a customer. This Rule is not intended to act or operate as a presumption or as a safe harbor for purposes of determining suitability or for any other legal obligation or requirement imposed under FINRA rules and the federal securities laws.
(a) Review Requirement
No member or person associated with a member shall recommend that a customer purchase or sell short any OTC Equity Security, unless the member has reviewed the current financial statements of the issuer, current material business information about the issuer, and made a determination that such information, and any other information available, provides a reasonable basis under the circumstances for making the recommendation.
(b) Definitions
(1) For purposes of this Rule, the term “current financial statements” shall include:
(A) For issuers that are not foreign private issuers,
(i) a balance sheet as of a date less than 15 months before the date of the recommendation;
(ii) a statement of profit and loss for the 12 months preceding the date of the balance sheet;
(iii) if the balance sheet is not as of a date less than 6 months before the date of the recommendation, additional statements of profit and loss for the period from the date of the balance sheet to a date less than 6 months before the date of the recommendation;
(iv) publicly available financial statements and other financial reports filed during the 12 months preceding the date of the recommendation and up to the date of the recommendation with the issuer’s principal financial or securities regulatory authority in its home jurisdiction, including the SEC, foreign regulatory authorities, and bank and insurance regulators; and
(v) all publicly available financial information filed with the SEC during the 12 months preceding the date of the recommendation contained in registration statements or SEC Regulation A filings.
(B) For foreign private issuers,
(i) a balance sheet as of a date less than 18 months before the date of the recommendation;
(ii) a statement of profit and loss for the 12 months preceding the date of the balance sheet;
(iii) if the balance sheet is not as of a date less than 9 months before the date of the recommendation, additional statements of profit and loss for the period from the date of the balance sheet to a date less than 9 months before the date of the recommendation, if any such statements have been prepared by the issuer; and
(iv) publicly available financial statements and other financial reports filed during the 12 months preceding the date of the recommendation and up to the date of the recommendation with the issuer’s principal financial or securities regulatory authority in its home jurisdiction, including the SEC, foreign regulatory authorities, and bank and insurance regulators.
(2) For purposes of this Rule, the term “current material business information” shall include information that is ascertainable through the reasonable exercise of professional diligence and that a reasonable person would take into account in reaching an investment decision.
(3) For purposes of this Rule, the term “OTC Equity Security’ shall have the meaning described in Rule 6420.
(c) Compliance Requirements
(1) A member shall designate a registered person to conduct the review required by this Rule. In making such designation, the member must ensure that:
(A) Either the person is registered as a General Securities Principal or General Securities Sales Supervisor, or the designated person’s conduct in complying with the provisions of this Rule is appropriately supervised by a General Securities Principal or General Securities Sales Supervisor; and
(B) Such designated person has the requisite skills, background and knowledge to conduct the review required under this Rule.
(2) The member shall document the information reviewed, the date of the review, and the name of the person performing the review of the required information. In the event that the person designated to perform the review is not registered as a General Securities Principal or General Securities Sales Supervisor, the member shall also document the name of the General Securities Principal or General Securities Sales Supervisor who supervised the designated person.
(d) Additional Review Requirement for Delinquent Filers
If an issuer has not made current filings required by the issuer’s principal financial or securities regulatory authority in its home jurisdiction, including the SEC, foreign regulatory authorities, or bank and insurance regulators, such review must include an inquiry into the circumstances concerning the failure to make current filings, and a determination, based on all the facts and circumstances, that the recommendation is appropriate under the circumstances. Such a determination must be made in writing and maintained by the member.
(e) Exemptions
(1) The requirements of this Rule shall not apply to:
(A) Transactions that meet the requirements of Rule 504 of SEC Regulation D and transactions with an issuer not involving any public offering pursuant to Section 4(2) of the Securities Act;
(B) Transactions with or for an account that qualifies as an “institutional account” under NASD Rule 3110(c)(4) or with a customer that is a “qualified institutional buyer” under Securities Act Rule 144A or “qualified purchaser” under Section 2(a)(51) of the Investment Company Act;
(C) Transactions in an issuer’s securities if the issuer has at least $50 million in total assets and $10 million in shareholder’s equity as stated in the issuer’s most recent audited current financial statements, as defined in this Rule;
(D) Transactions in securities of a bank as defined in Section 3(a)(6) of the Exchange Act and/or insurance company subject to regulation by a state or federal bank or insurance regulatory authority; or
(E) A security that has a bid price, as published in a quotation medium, of at least $50 per share. If the security is a unit composed of one or more securities, the bid price of the unit divided by the number of shares of the unit that are not warrants, options, rights, or similar securities must be at least $50.
(2) Pursuant to the Rule 9600 Series, FINRA, for good cause shown after taking into consideration all relevant factors, may exempt any person, security or transaction, or any class or classes of persons, securities or transactions, either unconditionally or on specified terms, from any or all of the requirements of this Rule if it determines that such exemption is consistent with the purpose of this Rule, the protection of investors, and the public interest.

2150. Improper Use of Customers’ Securities or Funds; Prohibition Against Guarantees and Sharing in Accounts

(a) Improper Use
No member or person associated with a member shall make improper use of a customer’s securities or funds.
(b) Prohibition Against Guarantees
No member or person associated with a member shall guarantee a customer against loss in connection with any securities transaction or in any securities account of such customer.
(c) Sharing in Accounts; Extent Permissible
(1)(A) Except as provided in paragraph (c)(2), no member or person associated with a member shall share directly or indirectly in the profits or losses in any account of a customer carried by the member or any other member; provided, however, that a member or person associated with a member may share in the profits or losses in such an account if:
(i) such person associated with a member obtains prior written authorization from the member employing the associated person;
(ii) such member or person associated with a member obtains prior written authorization from the customer; and
(iii) such member or person associated with a member shares in the profits or losses in any account of such customer only in direct proportion to the financial contributions made to such account by either the member or person associated with a member.
(B) Exempt from the direct proportionate share limitation of paragraph (c)(1)(A)(iii) are accounts of the immediate family of such member or person associated with a member. For purposes of this Rule, the term “immediate family” shall include parents, mother-in-law or father-in-law, husband or wife, children or any relative to whose support the member or person associated with a member otherwise contributes directly or indirectly.
(2) Notwithstanding the prohibition of paragraph (c)(1), a member or person associated with a member that is acting as an investment adviser may receive compensation based on a share in profits or gains in an account if:
(A) such person associated with a member seeking such compensation obtains prior written authorization from the member employing the associated person;
(B) such member or person associated with a member seeking such compensation obtains prior written authorization from the customer; and
(C) all of the conditions in Rule 205-3 of the Investment Advisers Act (as the same may be amended from time to time) are satisfied.

If you have questions regarding FINRA Rules, the Law Offices of David A. Carter, P.A. may be able to help. David A. Carter is a South Florida securities fraud attorney based in Boca Raton, Florida. He reviews securities fraud cases throughout the country and Florida, including reviewing securities fraud cases in Naples, Fort Myers, Bradenton, Sarasota, Port Charlotte, Clearwater, Tampa, St. Petersburg, Orlando, and Ocala. To contact the Law Offices of David A. Carter, P.A., please call 561-750-6999, or visit our website at http://www.carterpa.com.

The SEC approved new FINRA Rule 13806 and amendments to FINRA Rules 13214 and 13600 relating to promissory note proceedings.

FINRA is amending its Code of Arbitration Procedure for Industry Disputes to establish new procedures for administering cases that solely involve a firm’s claim that an associated person failed to pay money owed on a promissory note. In the absence of additional allegations by firms or associated persons, promissory note cases involve straightforward contracts with few documents entered into evidence. Rule 13806 is limited to claims related to promissory notes with no additional allegations being made in the Statement of Claim. Rule 13806 provides that a single public arbitrator from the roster of arbitrators approved to hear statutory discrimination claims will serve on the arbitration panel hearing a promissory note case.

If you have questions about this new FINRA Rule, or if you need representation in a dispute brought against you by your former brokerage firm, the Law Offices of David A. Carter, P.A. may be able to help. The Law Offices of David A. Carter, P.A. is a South Florida securities fraud, securities arbitration, investor protection, and Chapter 7 bankruptcy law firm based in Boca Raton. David Carter is a securities attorney that reviews securities fraud cases throughout the country and Florida, including securities cases in Orlando, Jacksonville, Tampa, Tallahassee, Gainesville, Boynton Beach, Delray Beach, Vero Beach and West Palm Beach. To contact the Law Offices of David A. Carter, P.A., please call 561-750-6999, or email us at contact@carterpa.com. For more information about the Law Offices of David A. Carter, P.A., you can also visit our website at www.carterpa.com.