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FINRA Will Require Broker-Dealers to File Private Placement Retail Communications

by | Sep 14, 2021 | General Business, Securities


More than a year ago, the Financial Industry Regulatory Authority (FINRA) said that it would make reviewing the rules for private placement retail communications by broker-dealers a special priority. Now, the financial regulator is following through on its promise.


FINRA has amended Rules 5122 and 5123—which govern the offering documents that must be filed in connection with private placements—to include retail communications that promote or recommend private placement offerings. 


The new rules take effect Oct. 1, 2021. Broker-dealers would be required to file retail communications with FINRA no later than the date on which a filing is required under rules 5122 and 5123. The rule changes will not apply to offerings that are currently exempt from filing requirements, FINRA has said. 




Prior to the amendments, Rules 5122 and 5123 did not require members to file retail communications, which are defined and governed by FINRA’s Rule 2210. A retail communication includes both written and electronic communications, and according to FINRA, examples of previously filed materials have included web pages, slide presentations, pitch decks, one-page “teasers,” fact sheets, sales brochures, executive summaries, and investor packets.


Rule 5122 applies to private placements of unregistered securities issued by a FINRA member. Under the rule, members are required to provide prospective investors with a private placement memorandum (PPM), term sheet, or other offering documents that, according to FINRA “discloses the intended use of the offering proceeds, the offering expenses and the amount of selling compensation that will be paid to the member and its associated persons.” 

The rule also requires a member to file the documents with FINRA at or prior to the first time the document is provided to any prospective investor. 


Rule 5123 requires members to file with FINRA offering documents used in connection with a private placement of securities within 15 calendar days of the date of first sale. Rule 5123 exempts private placements that are filed under other FINRA Corporate Financing Rules, as well as most of the same categories of private placements that are exempt from filing under Rule 5122. 


FINRA has said that it expects members will file most retail communications at the same time and in the same manner that they file their PPMs, term sheets and other offering documents. Any material amendments to retail communications must also be filed.


Many member private offerings are exempt from the rules’ requirements, including offerings sold only to institutional accounts, qualified purchasers as defined in the Investment Company Act of 1940, and qualified institutional buyers as defined in Rule 144A under the Securities Act of 1933. As a result of these exemptions, the rules apply predominately to private placements sold to retail investors.




Private placement documents, including retail communications are filed with FINRA’s Corporate Financing Department (CorpFin). Retail communications are often then forwarded to the Advertising Regulation Department (AdReg) for review. 


In its proposing the new amendments in October 2020, FINRA said retail communications for private placements “raise more compliance issues than those for other products.” It noted that a review of 1,726 filings of private placement communications made with AdReg either voluntarily or by new members between Jan. 1, 2017, and March 31, 2020, showed that 41 percent required revisions to comply with applicable standards, and 4 percent were so noncompliant with the rules that FINRA issued “do not use” review letters.


FINRA added that a spot check of private placement retail communications voluntarily filed with CorpFin and forwarded to AdReg in 2018 “revealed significant and pervasive violations of Rule 2210,” with 76 percent of retail communications failing to comply with the rule. Among the most common violations found were:


  • prohibited projections of performance or unreasonable forecasts. (For example, statements such as “return 4-6x invested capital net of fees,” or “management projects a $100 million revenue stream can be built in 5 years.”)
  • false or misleading statements.
  • failure to balance promotional content with the key risks associated with the investment. (For example, a real estate offering touted the benefits of purchasing properties leased by “investment grade” tenants without discussing that such holdings do not assure a profit or protect against loss.)
  • failure to disclose general risks (such as the speculative nature of the securities and the lack of liquidity of the investment).


To ensure compliance with the rules, broker-dealers should review their private placement retail communications to ensure they are avoiding the issues outlined above and are otherwise following the requirements of Rule 2210. They may wish to review their standards for private placement retail communications, as well as their policies and procedures related to reviewing and approving such content. And they may wish to conduct new training for employees on these issues.

To learn more about the rules, contact us for a consultation.