The Financial Industry Regulatory Authority, Inc. ("FINRA") has again released proposed revisions to FINRA Rule 5110 (Corporate Financing Rule – Underwriting Terms and Arrangements). FINRA originally filed, and later withdrew, a proposed rule change to amend FINRA Rule 5110 in October 2018 and then refiled its proposed rule change in April 2019 (discussed in greater detail here and here). The most recent changes, which address industry comments to the April 2019 release, have arrived in the form of a partial amendment. As highlighted in our previous article, the updates of most interest to structured notes issuers are the revisions to the treatment of derivatives acquired in connection with public offerings, the exemptions to the FINRA filing requirements and the revised definitions, the latter two of which have been updated by the recent amendment.

The FINRA filing requirement exemptions most frequently used by structured note issuers (the experienced issuer exemption and the investment grade debt exemption) have both been modified in the proposed rule.

The experienced issuer exemption remains unchanged from the April 2019 proposal and defines an "experienced issuer" as an issuer with a 36-month reporting history and at least $150 million aggregate market value of voting stock held by non-affiliates or, alternatively, an aggregate market value of voting stock held by non-affiliates of at least $100 million and an annual trading volume of three million shares. The investment grade debt exemption was expanded in the April 2019 update to explicitly include "banks," but has been modified in the recent amendment in order to clarify that the qualifying investment grade debt must be currently outstanding. The proposed definition of a "bank" has also been updated in the new amendment to include U.S. branches and agencies of foreign banks that are supervised by a federal or state banking authority, removing the requirement to seek a specific exemption from FINRA. This change more closely aligns the treatment of U.S. branches and agencies of foreign banks with their U.S. counterparts in line with broader bank regulatory policy.

While the proposed underwriting compensation and lock-up restriction provisions have also been revised in the recent amendment, the revisions do not affect the treatment of derivatives except to the extent that the proposed definition of "public offering" has been revised. FINRA has updated its proposed definition of "public offering" to correct the reference to offerings to accredited investors pursuant to Section 4(a)(5) of the Securities Act of 1933.

In addition to the above updates, the new amendment also: (i) modifies the requirement to file a description of any securities acquired and beneficially owned by any participating member during the review period; (ii) excepts "actively-traded" securities from the lock-up restriction; (iii) excludes reimbursed accountable expenses received in a prior offering from underwriting compensation in a revised public offering; (iv) exempts issuer self-tender offers; and (v) modifies the definition of issuer to clarify the carve out for participating members. The full text of the amendment, as well as other materials relating to the proposed changes to FINRA Rule 5110, is available here and the ongoing developments related to the proposed rule may be tracked using FINRA's Rule Filing Status Report.


Originally published in REVERSEinquiries, Volume 2, Issue 8.
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