May 30, 2019

Submitted via email to [email protected]

Vanessa Countryman,
Acting Secretary
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090

Re: SEC File Number SR-FINRA-2019-012

Dear Ms. Countryman:
The Securities Industry and Financial Markets Association (“SIFMA”)1 appreciates the opportunity to comment on SR-FINRA-2019-012 (the “Rule Change Proposal”), which sets forth extensive proposed amendments to FINRA Rule 5110 (the “Rule” and, as proposed to be amended by the Rule Change Proposal, the “Proposed Rule”).2

As explained by FINRA, the Rule Change Proposal “includes a range of amendments to Rule 5110, including reorganizing and improving the readability of the Rule” and covers “the following areas: (1) [f]iling requirements; (2) filing requirements for shelf offerings; (3) exemptions from filing and substantive requirements; (4) underwriting compensation; (5) venture capital exceptions; (6) treatment of non-convertible or non-exchangeable debt securities and derivatives; (7) lock-up restrictions; (8) prohibited terms and arrangements; and (9) defined terms.”3 SIFMA strongly supports FINRA’s efforts to review, streamline and modernize its rules and believes the Rule Change Proposal is an important step in that process.

Consistent with FINRA’s efforts, SIFMA believes there are additional opportunities for modification that would further streamline the Rule, reduce unnecessary costs and ease administrative burdens for both member firms and FINRA review staff, while at the same time preserving the essential investor and issuer protections afforded by the Rule. We believe the modifications suggested below would help clarify the operation of the Rule and make it more workable in everyday practice and, thus, would further FINRA’s stated goals expressed in the Rule Change Proposal.4 Finally, we believe our suggested modifications will lessen the burdens placed on capital formation under the Rule by providing greater certainty and reducing the need to request exemptive relief for commonly encountered issues.

Suggested Additional Modifications:

1. Requirement to File a Description of All Securities Acquired During the Review Period. In our comment letter with respect to RN 17-15 (the “2017 SIFMA Letter”),5 we stated that the requirement set forth in paragraph (a)(4)(B)(iv) of the Proposed Rule should only require a description of any securities-based underwriting compensation acquired during the review period by participating members, rather than a “description of any securities of the issuer acquired and beneficially owned by any participating member during the review period” (emphasis added). In declining to make this change, FINRA explained that a “description of any issuer securities acquired and beneficially owned by the participating member during the review period is needed to fully evaluate the underwriting terms and arrangements of the public offering and to ensure that there is no circumvention of the Rule.”6

We now understand FINRA’s concern that our suggestion in this regard was overbroad and believe that the provision could be modified in a manner that would both address FINRA’s concern and minimize the additional costs and administrative burdens that the proposed requirement would impose on member firms. Specifically, we believe the requirement should be limited to “a description of any securities acquired and beneficially owned by the participating member during the review period, other than those securities that are expressly excluded from characterization as underwriting compensation in the Rule.” Accordingly, disclosure would not be required with respect to, e.g., listed securities purchased in public market transactions, securities acquired as the result of a conversion of securities originally acquired prior to the review period, securities acquired in accordance with the so-called “Venture Capital Exceptions” and other securities acquisitions set forth in Supplementary Material .01(b) of the Proposed Rule.

We note that, without this change, the obligation to disclose all such securities acquisitions would impose significant additional costs and administrative burdens on member firms of the very kind sought to be eliminated by the Rule Change Proposal and, due to likely fluctuations in holdings over the review period, would be virtually impossible to comply with.

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1 SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s nearly one million employees, we advocate on legislation, regulation, and business policy affecting retail and institutional investors, equity and fixed income markets, and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. With offices in New York and Washington, D.C., SIFMA is the U.S. regional member of the Global Financial Markets Association.
2 See SEC Release No. 34-85715 (April 25, 2019), 84 Fed. Reg. 18592 (May 1, 2019) (the “Rule Change Filing”). See also FINRA Regulatory Notice 17-15 (April 12, 2017), which sought industry comment on FINRA’s proposed amendments to the Rule and served as the basis for the Rule Change Proposal (“RN 17-15”).
3 See Rule Change Filing at p. 4, 84 Fed. Reg. at 18592-3.
4 See Rule Change Filing at p. 3, 84 Fed. Reg. at 18592 (“FINRA recently conducted the equivalent of a retrospective review to further modernize the Rule by, among other things, significantly improving the administration of the Rule and simplifying the Rule’s provisions while maintaining important protections for market participants, including issuers and investors participating in offerings.”)
5 Available at http://www.finra.org/industry/notices/17-15.
6 See Rule Change Filing at p. 49, 84 Fed. Reg. at 18605.