The North American Securities Administrators Association (NASAA) has expressed disappointment at FINRA's partial amendment to a proposed rule that would require FINRA members and associated persons that offer or sell certain private placements to provide relevant disclosure to each investor prior to sale. Although generally supporting FINRA’s efforts to increase disclosures of information to investors in private offerings through proposed Rule 5123, NASAA believes that the amendments to the rule do not provide material gains in the area of protecting investors and are insufficient to promote confidence in the markets. In a comment letter to the U.S. Securities and Exchange Commission on April 23, 2012, NASAA wrote that state securities regulators view the partial amendment as "highly watered down" and a step in the wrong direction towards dealing with fraud in Regulation D and other private placements.
NASAA reminded the SEC that improving investor protections and preventing fraud promotes confidence in the market, which in turn creates the foundation for improving capital formation. NASAA expressed disappointment, therefore, that the proposed amendment does not take a strong stand to improve investor protections. In particular, FINRA's partial amendment does not address concerns raised by state regulators in NASAA's comment letter of November 17, 2011 regarding the initial proposal.
NASAA stated that the proposal lacks substantive review of private placements by any regulator, while the exemptions to the proposed rule are too extensive. NASAA also questioned FINRA's retreat from efforts to expand the "85 Percent Rule" currently found in FINRA Rule 5122 (Private Placements of Securities Issued by Members), which requires that at least 85 percent of a "Member Private Offering" may not be used to pay for offering costs and compensation, and must be used for business purposes disclosed in the offering document.
Additionally, Rule 5123 does not require firms to disclose the risks associated with private placements, and fails to address the fact that persons acting as finders may still be subject to state registration requirements. Finally, NASAA believes that the confidentiality provisions in the proposal should not outweigh investor protection and should not be used to prohibit information sharing with the states.
NASAA observed that FINRA itself has acknowledged that there are significant concerns about private placements. In a letter to the SEC that responded to public comments on the initial proposal, FINRA had stated that it received over 1100 complaints in 2011 concerning private placements, and that it had over 250 open investigations of these matters. FINRA also noted that in 2010, state regulators brought over 250 actions involving Rule 506 or Regulation D offerings.