Papilsky Rules - Latham & Watkins

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Endnotes
1
See SEC Release No. 34-62539; File No.
SR-FINRA-2010-029 (July 21, 2010). NASD
Rules 2730, 2740 and 2750 are generally
referred to as the “Papilsky Rules” because
of the court decision with which they are often
associated, Papilsky v. Berndt, Fed. Sec. L. Rep
(CCH) 95,627 (S.D.N.Y. June 24, 1976).
FINRA issued a notice to its members relating
to the proposed rule on August 4, 2009 and
originally submitted the rule proposal to the
SEC shortly thereafter, but then withdrew it
for technical reasons in November 2009. The
proposed rule was re-submitted to the SEC,
without substantive change, on May 27, 2010.
See FINRA Regulatory Notice 09-45 (August
2009) (FINRA Notice 09-45); SEC Release
No. 34-62299 (June 16, 2010) (the Proposing
Release).
2
The definition of “fixed price offering” is now set
forth in the supplementary materials to FINRA
Rule 5141 and is essentially unchanged from
the definition currently set forth in NASD Rule
0120(h). As so defined, the term “fixed price
offering” refers to securities publicly offered
(in whole or in part) in the United States at a
stated offering price or prices. See FINRA Rule
5141.04. The term includes offerings registered
in the United States under the Securities Act
of 1933, as well as offerings that, although
public, are not required to be registered under
the Securities Act pursuant to an applicable
exemption (e.g., bank securities offered pursuant
to Section 3(a)(2) of the Securities Act). The
term, however, does not include offerings of
securities that are privately placed or offered and
sold pursuant to Rule 144A under the Securities
Act. It is also important to note that the term
“fixed price offering” does not prohibit “multiple
price” offerings so long as the different fixed
prices are adequately disclosed. See Proposing
Release; NASD Notice to Members 81-3.
3
FINRA Notice 09-45.
4
NASD Rule 2730 was intended to prevent
members from paying a higher price for the
securities taken in trade, thereby lowering the
purchase price of the securities purchased by
the investor in the fixed price offering.
5
The purpose of NASD Rule 2740 was to prevent
members from granting discounts to favored
investors, such that those investors would be
able to purchase securities in the offering at a
lower price than other investors.
6
NASD Rule 2750 was intended to prevent
purchasers from obtaining a discount through the
establishment of an affiliated broker-dealer that
would receive designated selling credit for the
sale.
7
FINRA Rule 5141(a).
8
FINRA Rule 5130 generally prohibits FINRA
members from selling equity securities offered
in initial public offerings to certain “restricted
persons” (a term which includes, among others,
broker-dealers and certain persons having a
beneficial interest in a broker-dealer).
9
FINRA Rule 5141.03 provides that ordinary
course transactions between a member and its
affiliates that are unrelated to the purchase or
sale of securities in a fixed price offering will not
be deemed to confer a “reduced price” under the
rule.
10
FINRA Rule 5141.01.
11
FINRA Rule 5141.02.
12
FINRA Rule 5141.05.
13
The adoption of FINRA Rule 5141 does not
impact existing NASD Rule 2420 (Dealing with
Non-Members), although such rule is the subject
of another pending FINRA rule proposal. See
FINRA Regulatory Notice 09-69 (December
2009) (proposing, among other things, to delete
current NASD Rule 2420 and replace it with new
FINRA Rule 2040) (FINRA Notice 09-69).
Also note that current NASD Rule 2420(c)
continues to require an agreement by any
non-US broker-dealer that receives a selling
concession, discount or other allowance from
a FINRA member to agree to the restrictions
set forth in the rule as if it were itself a FINRA
member in respect of any sales of securities
it makes to persons in the United States. The
FINRA proposal discussed in FINRA Notice
09-69 would eliminate this requirement and
further simplify the provisions of existing NASD
Rule 2420. In particular, if adopted as proposed,
new FINRA Rule 2040 would (in pertinent part)
prohibit members from, directly or indirectly,
paying or offering to pay any “compensation,
fees, concessions, discounts, commissions or
other allowances to . . . any person that is not
registered as a broker-dealer under Section
15(a) of the Exchange Act but, by reason of
receipt of any such payments, is required to be
so registered under applicable federal securities
laws and [Exchange Act] rules, regulations and
published guidance issued by the SEC or its
staff in the form of releases, no-action letters or
interpretations.” See FINRA Notice 09-69.
4 Number 1069 | August 5, 2010