FINRA updated the "Interpretations of Financial and Operational Rules" concerning net capital requirements for brokers or dealers. Specifically, the update concerns Exchange Act Rule 15c3-1(c)(2)(viii) ("Open Contractual Commitments") and relates to the conditions under which the beneficiary of an underwriting backstop agreement in a firm commitment underwriting would not be required to take a contractual commitment charge where the provider of the backstop took the charge instead.
Commentary / Steven Lofchie
This is an interesting, even if somewhat obscure, interpretation. A reasonable guess is that the purpose of the interpretation is to allow smaller firms to participate in underwriting without taking the capital charge (or the underwriting risk). While the public policy of this interpretation is clear, it also means that the prospectus disclosure of the underwriters and their underwriting commitment is no longer accurate; i.e., firms that seem to be at risk in an underwriting may actually benefit from a backstop arrangement.
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