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Dodd-Frank

New Broker-Dealer Notice-Filing Obligations in Private Placements

by   |   June 13, 2012

On June 7, 2012, SEC approved new FINRA Rule 5123, which imposes a new notice filing requirement on broker-dealers in private placements.  Specifically, the rule requires that a broker-dealer that offers or sells securities in a private placement file a copy of the disclosure documents that were given to prospective investors (including any PPM, term sheet, or other document, with exhibits) with FINRA within 15 days after the first sale in the offering.  If no disclosure document is provided to investors in connection with the private placement, the broker-dealer must notify FINRA of such fact.

The final rule is a step back from the reforms initially proposed by FINRA on October 5, 2011.  The original proposal would have required that broker-dealers ensure that prospective investors be notified of the anticipated use of proceeds, offering expenses, and offering compensation.  If this information was not included in the offering documents, the original rule would have required the broker-dealer to create a separate disclosure document that did contain the required information, and to distribute that separate document to prospective investors.  The original rule would have also required the broker-dealer to file a copy of the offering documents with FINRA within 15 days of the first sale, and to file any amendments to the offering documents with FINRA within 15 days of the date first distributed to prospective investors. 

In response to a number of comment letters, the original rule underwent three amendments that reigned in the new requirements on broker-dealers.  The result is a new notice filing requirement only.  Broker-dealers are not required to ensure that use of proceeds, offering expenses, and offering compensation information is distributed to investors, and they are not required to file amendments to offering documents with FINRA.  You can read the text of the initial rule, the amendments, the comment letters, and FINRA responses here.

There are several exemptions to the new rule, including offerings in which the FINRA member sells to only institutional accounts, qualified purchasers, qualified institutional buyers, investment companies, issuer employees and affiliates, or accredited investors.

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