United States: SEC Approves Amendments To FINRA’s Corporate Financing Rule

Last Updated: May 23 2014
Article by Nilene R. Evans, Lloyd S. Harmetz and Daniel Nathan

Broader Availability of Termination Fees and Rights of First Refusal

Elimination of Filing for Certain ETFs

In May 2014, the SEC approved FINRA's proposed amendments to Rule 5110, commonly called the Corporate Financing Rule.1 The Corporate Financing Rule addresses commercial fairness in underwriting and other arrangements for the distribution of securities. Rule 5110 provides for review by FINRA of underwriting or other arrangements in connection with most public offerings in order to enable FINRA to assess the fairness and reasonableness of proposed underwriting compensation and arrangements. In addition, the underwriters of an offering must comply with a variety of substantive provisions in Rule 5110, even if the offering is exempt from filing.

Among other changes, the amendments expand an investment bank's ability to include termination fees and rights of first refusal in engagement letters, and eliminate the requirement to file offerings of certain additional types of ETFs.

FINRA's rule revisions may be found here.

Deferred Compensation

The Corporate Financing Rule limits the terms of deferred compensation provided in engagement letters between issuers and investment banks in connection with private offerings as well as public offerings. As noted by FINRA, a deferred compensation arrangement responds to issuer concerns that up-front payment for financial advisory services could adversely affect the issuer's business. The deferred compensation arrangement, on the other hand, responds to the investment bank's concern that an issuer may unreasonably terminate an engagement letter and thus avoid compensating the investment bank for its efforts. FINRA has traditionally limited certain types of deferred compensation arrangements.

An investment bank typically seeks to protect itself against the risk of early termination by including in the engagement letter a "termination fee." A termination fee permits the investment bank to receive fees if its services are terminated and the issuer consummates a similar transaction instead of the transaction subject to the engagement letter. FINRA has previously interpreted Rule 5110(f)(2)(E) to permit termination fees only in exchange offers or similar transactions in which substantial structuring and advisory services beyond traditional underwriting and distribution services have been provided. FINRA also permits a right of first refusal ("ROFR"), which grants an investment bank the right to act in an agreed-upon capacity in a subsequent financing transaction; however, FINRA has interpreted the rule to prohibit a ROFR when a member's participation in the original transaction is terminated.

In adopting the amendments, FINRA expressed its concern that its existing restrictions may "unnecessarily interfere" with the ability of issuers and investment banks to negotiate deferred or other appropriate compensation arrangements.

Under revised Rule 5110(f)(2)(D), FINRA will allow termination fees and ROFRs when the written engagement letter between the issuer and investment bank specifies that:

  • the issuer has a right of "termination for cause," which includes the member's material failure to provide the underwriting services contemplated in the agreement; and
  • an issuer's termination for cause eliminates any obligations with respect to any termination fee or ROFR.

In addition, the amount of the termination fee must be reasonable in relation to the underwriting services contemplated in the engagement letter, and fees arising from underwriting services provided under a ROFR must be customary for those types of services.

The revised rule retains the prior requirements for termination fees to be paid only if an offering or other transaction described in the engagement letter is consummated within two years of the date the engagement letter is terminated, and a ROFR cannot have a duration of more than three years from the date of effectiveness or commencement of sales of a public offering. These limitations are intended, for example, to prevent an issuer from having to pay termination fees, or being subject to a ROFR, even after its business and operations may have changed significantly since the time that the original investment bank was involved in the transaction.

In addition, the revised rule continues the prior requirement that the applicable agreement may not provide the investment bank with more than one opportunity to waive or terminate the ROFR upon payment of a fee by the issuer.

In preparation for the effective date of the revised rules, investment banks may wish to revise their forms of engagement letters and similar documents to satisfy the relevant provisions.

Elimination of Filing for Certain ETFs

Rule 5110 currently exempts exchange-traded funds ("ETFs") structured as open-ended investment companies or unit investment trusts from regulation under the rule, including required filings with FINRA's Corporate Financing Department. Under the amendment, FINRA will exempt from filing offerings of securities issued by an ETF formed as a trust, partnership, corporation, limited liability company or other collective investment vehicle in which the portfolio assets include commodities, currencies or other assets that are not securities. These types of ETFs do not register under the Investment Company Act of 1940.

FINRA stated in its rule proposal that the Corporate Financing Rule is not designed for the ETF distribution methodology, and that ETFs should be treated consistently, without regard to their formal legal structures, based on the nature of the securities held in the ETF's portfolio. These types of ETFs will still be required to comply with the substantive requirements of Rule 5110; however, they will not be required to file offering documents under the rule.

Ministerial Amendments Relating to Electronic Filings

The revised rule also contains non-substantive ministerial changes to help clarify the requirement that all filings under the rule be made electronically.

Effective Date

FINRA will announce the implementation date of the rule changes in a Regulatory Notice that will be published within 60 days of the SEC's approval. The effective date of the new rules is expected to occur within 120 days after the SEC approval.


1 The SEC's approval order may be found at the following link: http://www.finra.org/web/groups/industry/@ip/@reg/@rulfil/documents/rulefilings/p505274.pdf .

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Nilene R. Evans
Daniel Nathan
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.