New FINRA Rule Requires Filing of PPMs and Disclosure
FINRA has asked the SEC to approve new Rule 5123 that would require BDs that sell private placement to file the PPMs with FINRA and ensure certain disclosures. The proposed rule would require a BD to file the PPM within 15 days after the date of the first sale. FINRA will not comment on the PPMs or delay offerings. The Rule includes several exemptions including offerings to qualified purchasers and QIBs. FINRA will afford the PPMs confidential treatment. Additionally, the BD would be required to ensure that the PPM include disclosure about intended use of offering proceeds, offering expenses, and compensation to sponsors, finders, and other distributors. FINRA expects BDs to discover this information as part of their reasonable inquiry suitability due diligence.
OUR TAKE: Despite widespread industry opposition, we expect that the SEC will pass the rule, as FINRA has already vetted the concept when it proposed amendments to Rule 5122 in January. We are still unclear how FINRA will utilize this information. We are also unclear how distributors can force disclosure on issuers and their lawyers.
I agree with your take away. This also appears to be more politically motivated than designed to address a regulatory purposes. The categories of disclosures that FINRA wants to ensure are in PPMs are already included in all private placements. Most responsible law firms add these disclosures as a best practice and to address disclosure risk. Once again this rule proposal appears to be politically motivated and to send a message to Congress to assist in the further undermining of the SEC. FINRA may be forwarding its agenda to become the industry SRO.