FINRA Requests Comment on Modernizing FINRA Rules, Guidance and Processes to Facilitate Capital Formation

Summary

A vibrant and efficient capital-raising process fosters business expansion, job creation, innovation and economic growth. FINRA members play a critical role in facilitating capital formation for businesses of all sizes. FINRA supports the capital-raising process through appropriately tailored rules for its members that are designed for the benefit of all market participants.

As a self-regulatory organization (SRO), FINRA is committed to continuous improvement that draws on deep engagement with its member firms. Regularly modernizing rules and regulatory oversight benefits member firms, investors and other market participants, as well as the broader economy. As part of its commitment to continuous improvement, FINRA is conducting a broad review of its regulatory requirements applicable to member firms and associated persons.¹ FINRA has identified capital formation as an initial area of focus for this review.

Over the years, FINRA has published Regulatory Notices requesting comment on ways to increase efficiency and reduce unnecessary costs and burdens to promote capital formation, and has updated its regulatory framework based on that feedback. As part of the broad rule modernization review, this Notice requests comment on whether additional changes to FINRA rules, guidance, operations or administrative processes would further facilitate capital formation and reduce unnecessary regulatory costs and burdens impacting the capital-raising process.

Questions regarding this Notice should be directed to:

• Joseph Sheirer, Senior Vice President, Corporate Financing & Advertising Regulation, by email or (732) 596-2025;
• Micah Hauptman, Associate General Counsel, Office of General Counsel (OGC), by email or (202) 728-8123; or
• Matthew Vitek, Associate General Counsel, OGC, by email or (240) 386-6490.

Action Requested

FINRA encourages all interested parties to comment. Comments must be received by May 19, 2025.

• Online using FINRA’s comment form for this Notice;
• Emailing comments; or
• Mailing comments in hard copy to:
  
  Jennifer Piorko Mitchell
  Office of the Corporate Secretary
  FINRA
  1700 K Street, NW
  Washington, DC 20006

To help FINRA process comments more efficiently, persons should use only one method to comment.

Important Notes: All comments received in response to this Notice will be made available to the public on the FINRA website. In general, FINRA will post comments as they are received.²

Background & Discussion

A vital component of our nation’s economic strength is the ability of businesses of all sizes to efficiently raise capital. This allows businesses to grow, innovate and create jobs. In turn, well-functioning securities markets that promote issuer and investor confidence are essential to the capital-formation process. FINRA members perform a critical role in the capital-raising process, which is ever-evolving, and our regulatory framework must also evolve to ensure that it continues to support capital formation.

Recent Updates to FINRA’s Regulatory Framework to Support Capital Formation

In 2017 and 2023, FINRA published Regulatory Notices broadly requesting comment on ways to increase efficiency and reduce unnecessary costs and burdens on the capital-raising process without compromising protections for investors and issuers.³ In response to feedback on those Notices from member firms and other interested parties, FINRA’s experience, changes in the law and innovations in the marketplace, FINRA has revised its rules and implemented operational improvements to modernize its regulation of members’ participation in capital-raising activities by amending rules, updating guidance and revamping processes.⁴

Continuing its focus on ongoing improvement, FINRA published Regulatory Notice 24-17 requesting comment on proposed amendments to FINRA’s corporate financing rules (Rules 5110 (Corporate Financing Rule—Underwriting Terms and Arrangements), 5121 (Public Offerings of Securities With Conflicts of Interest) and 5123 (Private Placements of Securities)) to further enhance capital formation.⁵ Because those proposed amendments are pending, this further request for comment does not supersede them or any other requests for comment currently open.

Further Request for Comment on Supporting Capital Formation

This Notice seeks comment about other potential changes to further facilitate capital formation.

As discussed below, FINRA is requesting comment in several specific areas:

• capital acquisition brokers (CABs) and other limited purpose broker-dealers;
• research; and
• rules and Regulatory Notices setting standards for members' supporting capital formation.

In addition to these specific areas, FINRA is requesting comment on any of its rules, guidance or processes that may impose barriers to capital raising and how they might be modified to further facilitate capital formation. FINRA also welcomes comment on how its rules and programs relate to the broader regulatory framework for member firms and associated persons, and whether there are opportunities for FINRA to more closely align with the work of other regulators to promote capital formation and investor protection.⁶ This feedback will assist FINRA in its rule modernization efforts.

As part of these efforts, FINRA will separately engage in its rulemaking process to propose any specific rule amendments, which includes discussions with the FINRA Board, input from FINRA’s advisory committees and an opportunity for comment on specific proposed revisions in a Notice or rule filing with the Securities and Exchange Commission (SEC or Commission) or both. Before becoming effective, the proposed rule change must be filed with the SEC pursuant to Section 19(b) of the Securities Exchange Act of 1934 (SEA or Exchange Act).⁷

A. CABs and Other Limited Purpose Broker-Dealers

In 2016, FINRA adopted a separate dedicated rule set for CABs.⁸ As defined, CABs are broker-dealers essentially focused on acting as placement agents for sales of unregistered securities to institutional investors, acting as intermediaries in connection with the change of control of privately held companies, and advising companies and private equity funds on capital raising and corporate restructuring. CABs are subject to fewer restrictions on specified activities (such as advertising) and have less extensive supervisory requirements because their activities are limited to specific, lower risk capital raising.⁹

Broker-dealers engaged in similarly limited activities have been addressed in other contexts. In December 2022, Congress amended the Exchange Act to create a registration exemption for merger and acquisition brokers (M&A Brokers).¹⁰ M&A Brokers are persons that effect securities transactions solely in connection with the transfer of ownership of specified privately held companies, subject to certain conditions. In addition, in October 2020, the SEC proposed, but to date has not adopted, a conditional exemption from broker registration requirements for “finders” who assist issuers with raising capital in private markets by identifying potential investors.¹¹

We request comment regarding CABs and other limited purpose broker-dealers, as well as other related issues of interest to commenters.

B. Research

FINRA’s research rules, Rule 2241 (Research Analysts and Research Reports) and Rule 2242 (Debt Research Analysts and Debt Research Reports), adopted in response to concerns that conflicts of interest had eroded the integrity of research, are intended to foster objectivity and transparency in research reports to provide investors with more reliable information when making investment decisions. In general, these rules require research analysts to disclose their conflicts of interest in research reports and public appearances. The rules further limit specific conflicts that cannot be effectively managed by disclosure—for example, they generally require structural separation between investment banking and research personnel.

In addition to FINRA’s research rules, other regulatory requirements directly address research conflicts. These include SEC Regulation Analyst Certification (Reg AC), which is designed to ensure the views expressed by research analysts in their research reports accurately reflect their personal views,¹³ as well as the 2003 Global Research Analyst Settlement (Global Settlement)—a settlement entered into by a number of broker-dealers with the SEC, SROs (then NASD and NYSE) and state regulators to address conflicts of interest between equity research analysts and investment banking.¹⁴ The Global Settlement, which applies only to the settling firms and their successors, continues to impose additional proscriptions on those firms beyond the requirements of Rule 2241 and Reg AC.

In the many years since FINRA adopted its research rules, the research business and the role of research analysts at broker-dealers have undergone significant changes. News articles and other reports indicate that research budgets have diminished, with a concomitant reduction in coverage, due to several factors associated with changes in public and private securities markets.¹⁵ In particular, the articles and reports note changes to the European Union (EU) and United Kingdom (UK) regulations requiring payments for research to be unbundled from transaction costs as potentially having contributed to these changes.¹⁶ The reduced research budgets have particularly impacted smaller issuers, as detailed in the February 2022 SEC Staff Report.¹⁷ While the report was unable to attribute a specific cause to declining research coverage of smaller issuers, it identified several potential contributing factors including the Global Settlement and the regulatory measures taken by Congress, the SEC and SROs.¹⁸ Recent technological advancements, including the advent of generative artificial intelligence, could further alter research business models.¹⁹

The various requirements governing research seek to ensure that the research information provided to investors is objective and reliable. These requirements seek to address core conflicts that may compromise research analysts’ objectivity, particularly when their research is used to obtain investment banking business. Nonetheless, FINRA’s requirements have not been substantially revisited in recent years while the research business has evolved.

Thus, we request comment on the following questions regarding research. To the extent members’ research is adversely affected by other factors, please comment on those other factors as well.

C. Rules and Regulatory Notices Setting Standards for Members’ Supporting Capital Formation

A number of FINRA rules cover aspects of public and private securities offerings, as well as trading standards and practices. Together, these rules promote the capital-raising process through appropriately tailored requirements for members that are designed for the benefit of all market participants. FINRA is highlighting below some of those rules and related guidance followed by requests for comment on them. To the extent that there are rules and guidance not listed below that you believe have a significant impact on members’ supporting capital formation, please comment on those as well.

FINRA Rule 2310 (Direct Participation Programs) requires that members participating in a public offering of direct participation programs and unlisted real estate investment trusts, referred to as Investment Programs, meet certain requirements regarding underwriting compensation, fees and expenses, perform due diligence on the Investment Program, follow specific guidelines on suitability and adhere to limits on non-cash compensation.

Rule 5110 (Corporate Financing Rule—Underwriting Terms and Arrangements) addresses underwriting compensation in connection with the public offering of securities. The ability of small and large businesses to raise capital efficiently is critical to job creation and economic growth. The primary function of Rule 5110 is to protect issuers (and their investors at the time of the offering) from unfair underwriting terms and arrangements.

In 2020, FINRA amended Rule 5110 to better reflect current industry practices.²² As noted above, we also recently proposed additional amendments to modernize and clarify other parts of Rule 5110 regarding evaluating underwriting compensation, including the valuation method for and important exceptions from securities acquisitions that are considered underwriting compensation.²³

Rule 5121 (Public Offerings of Securities with Conflicts of Interest)applies to public offerings of securities in which a participating member or any of its associated persons or affiliates has a conflict of interest with the issuer. If a member with a conflict of interest participates in a public offering, the rule requires "prominent disclosure" and, in certain circumstances, a qualified independent underwriter (QIU). We recently proposed amendments to Rule 5121 to simplify compliance and improve the operation of the rule by clarifying the substantive requirements of a conflicted member and a QIU.²⁴

FINRA Rule 5122 (Private Placements of Securities Issued by Members) requires a member to file when it offers or sells a private placement of unregistered securities by a member or control entity. Its companion rule, FINRA Rule 5123 (Private Placements of Securities), requires a member that sells any other type of private placement to file a copy of any offering documents with FINRA within 15 calendar days of the first sale, subject to various exemptions.

Both rules provide exemptions from filing for certain types of offerings, and for offerings sold solely to certain types of investors such as qualified purchasers, institutional purchasers and other sophisticated investors. FINRA recently proposed amendments to expand the exemption for certain family offices and certain entities with assets under management in excess of $5 million, consistent with the SEC’s treatment of those categories.²⁵

FINRA has companion rules protecting the integrity of the initial public offering (IPO) process. Rule 5130 (Restrictions on the Purchase and Sale of Initial Equity Public Offerings) protects the integrity of the public offering process by ensuring that: (1) members make bona fide public offerings of securities at the offering price; (2) members do not withhold securities in a public offering for their own benefit or use such securities to reward persons who are in a position to direct future business to members; and (3) industry insiders, including members and their associated persons, do not take advantage of their insider position to purchase new issues for their own benefit at the expense of public customers.²⁶

Rule 5131 (New Issue Allocations and Distributions) addresses conflicts and abuses in the allocation and distribution of new issues, including quid pro quo allocations, spinning and flipping, among other things.²⁷ Rule 5131 also addresses new issue pricing and trading practices, including requirements related to reports of indications of interest and final allocations, lock-up agreements and agreements among underwriters.²⁸ Further, the rule prohibits the acceptance of market orders for the purchase of shares of a new issue in the secondary market prior to the commencement of trading in the secondary market.²⁹

In Regulatory Notice 09-05, FINRA reminded members of their obligations to determine whether securities are eligible for public sale and provided examples of “red flags” that may signal that a closer look is warranted. FINRA has received feedback noting that, since 2009, the regulatory landscape for over-the-counter (OTC) equity securities has changed significantly—particularly, the Commission’s 2020 amendments to SEA Rule 15c2-11—and recommending that FINRA’s guidance in Regulatory Notice 09-05 should be modified in light of these changes.³⁰ The Commission’s amendments to SEA Rule 15c2-11, among other things, require that issuer information be current and publicly available for brokers to quote their securities in the OTC market. The amendments also permit members to rely on the publicly available determinations of a “qualified interdealer quotation system”³¹ with respect to the required information review, the availability of specified exceptions to SEA Rule 15c2-11, and the public availability of current issuer information.³²

D. General Request for Information

FINRA requests comment on any of its rules, guidance (i.e., Regulatory Notices, FAQs, and other FINRA published materials) or processes that affect the capital-raising process and how they might be modified to further reduce burdens impacting capital formation. In particular, FINRA requests comment on the following questions:

Conclusion

FINRA’s rules are one part of a larger regulatory structure that significantly affect the capital-raising process. While FINRA has actively revised its rules affecting capital raising over the years, FINRA is aware that the marketplace is constantly changing and that regulatory requirements must be monitored and revised as market changes occur. To this end, we request your feedback on the changes to the marketplace and how FINRA rules, guidance and processes should be modernized in response. FINRA looks forward to hearing from interested parties in response to this Notice.
 

Endnotes