Tuesday, December 04, 2012

FINRA Rule 5123 Takes Effect to Enhance Oversight of Private Placements

On December 3rd 2012, new FINRA Rule 5123 goes into effect, requiring a notice filing requirement for some types of private placements. According to Thomas Selman, FINRA Executive Vice President for Regulatory Policy, Rule 5123 will enable FINRA to better police the private placement market, which has been the source of many instances of abuse. In FINRA’s administration of Rule 5123, he related, FINRA staff will be particularly interested in the extent to which a broker-dealer selling a private placement has undertaken a reasonable inquiry concerning the security and the issuer.

The SEC found that Rule 5123 is consistent with Section 15A(b)(6) of the Exchange Act, which requires that FINRA rules be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. In approving the rule, the Commission also considered the rule’s impact on efficiency, competition, and capital formation.

In filings with the SEC, FINRA stated its belief that Rule 5123 is consistent with the JOBS Act. In particular, FINRA stated that it believes that requiring a member to make a notice filing subsequent to a sale of a private placement would not unnecessarily burden members or capital formation in light of the intended regulatory benefits to investors of the resulting enhanced oversight. FINRA suggested that investor confidence would be fostered by the enhanced oversight resulting from Rule 5123 and that it would thereby facilitate capital formation. FINRA further reiterated its view that Rule 5123 would enhance its regulatory oversight of broker-dealers that sell securities in the private placement market.

In response to comments that FINRA can only partially address the problems in this area unless the SEC also adopts rules applicable to issuers and unregulated persons, who provide essentially the same services as FINRA members, FINRA said that it generally supports broader oversight of private placements and stated that improvement in the protection of broker-dealer customers should not depend upon whether the Commission adopts rules for issuers and entities not subject to FINRA’s oversight.  

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