FINRA to Tighten Regulations for Private Placement Marketing Communication
According to the Financial Industry Regulatory Authority this week, the regulator has filed a proposed rule change with the Securities and Exchange Commission to require broker-dealers to file retail communications relating to private placement offerings.
The regulator is seeking to amend two current private placement rules, FINRA Rule 5122 and FINRA Rule 5123, requiring broker dealers to file communications in order to improve compliance and protect investors.
- FINRA Rule 5122 (Member Private Offerings) requires firms that offer or sell their own securities or those of a control entity to file with the Corporate Financing Department a private placement memorandum, term sheet or other offering document at or prior to the first time the documents are provided to any prospective investor.
- FINRA Rule 5123 (Private Placements of Securities) requires firms to file with FINRA’s Corporate Financing Department within 15 calendar days of the date of first sale of a private placement, a private placement memorandum, term sheet or other offering document, or indicate that no such offerings documents were used.
Retail communications may include web pages that promote the offering, slide presentations, pitch decks, one-page “teasers,” fact sheets, sales brochures, executive summaries, and investor packets.
FINRA believes that “due to the high rate of non-compliance of private placement retail communications, and the increased risk of investor harm associated with those communications,” amending Rules 5122 and 5123 to require such retail communications to be filed, will offer protections for retail investors.
The regulator notes that under current rules, retail communications have been voluntary and problematic with significant violations, according to a 2018 spot check.
The most common violations, according to FINRA, were prohibited projections of performance or unreasonable forecasts, and false or misleading statements.
Other violations include failure to disclose general risks, such as the speculative nature of the securities and the lack of liquidity of the investment or failure to balance promotional content with the key risks associated with the investment.
If the SEC approves the proposed rule change, FINRA will announce the effective date of the rule change in a regulatory notice to be published no later than 60 days following SEC approval. The effective date will be no later than 180 days following publication announcing SEC approval.
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Brokers have a fiduciary duty to make investment recommendations that are consistent with the clients net worth, investment experience and objectives. Risk tolerance, age, and liquidity needs also need to be considered.
When brokers violate securities laws, such as making unsuitable investments, the brokerage firm they are working with may be liable for investment losses through FINRA Arbitration.
This information is publicly available on FINRA’s website and provided to you by The White Law Group.
If you are concerned about your private placement investments please call the offices at 888-637-5510 for a free consultation with a securities attorney.
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