Regulatory Notice 09-49 - finra

August 200909-49➤If, as a result of the public offering and any transactions contemplated at thetime of the public offering: (i) the member firm will be an affiliate of the issuer;(ii) the member firm will become publicly owned; or (iii) the issuer will become amember firm or form a broker-dealer subsidiary.When a member firm with a conflict of interest participates in a public offering, a QIUmay be required. If so, the QIU must participate in the preparation of the registrationstatement and the prospectus, offering circular or similar document (i.e., the offeringdocument) and exercise the usual standards of due diligence with respect to theoffering document. The new rule eliminates the pricing responsibilities of the QIU.Any offering that requires a QIU must be filed with FINRA’s Corporate FinancingDepartment for review pursuant to FINRA Rule 5110 (Corporate Financing Rule). 7FINRA notes that while the term “participation in a public offering” in Rule 2720generally has the same meaning as in FINRA Rule 5110, 8 the new rule continues toapply specifically to a member firm’s participation in the distribution of a publicoffering as an underwriter, member of the underwriting syndicate or selling group,or otherwise assisting in the distribution of the public offering (i.e., not when amember firm acts solely as a finder, consultant or advisor, given these capacitiesgenerally do not involve managing or distributing a public offering).There are circumstances in which a member firm with a conflict of interest mayparticipate in a public offering without the use of a QIU. Specifically, the new ruleeliminates the need for a QIU if: (i) the member firm with a conflict of interest or anaffiliate is not managing the offering; or (ii) the offered securities have a “bona fidepublic market” or are “investment grade rated” or are securities in the same series thathave equal rights and obligations as investment grade rated securities (e.g., securitiesissued under a medium-term note program). FINRA notes that the definition of “bonafide public market” in Rule 2720(f)(3) is changed substantially from the definition of“bona fide independent market,” which it replaces, in that the new rule defines a bonafide public market in accordance with the numerical standards set forth in the SEC’sRegulation M under the Exchange Act. 9In cases where two or more book-running lead managers have equal responsibilitieswith regard to due diligence, each must be free of conflicts of interest, otherwise theQIU provisions under the new rule would apply and the offering would be subject tothe filing requirements under Rule 5110.If a QIU is not required, the offering will not have to be filed with FINRA. Whether ornot a filing is required, however, the new rule still requires prominent disclosure of thenature of the conflict in the offering documents. In addition, a member firm with aconflict of interest must comply with the discretionary accounts requirement, andwhere applicable the escrow, net capital computation and related disclosure provisionsof the rule, as described below.Regulatory Notice 3