Category Archives: FINRA

FINRA Proposes Amendments to Rule 5122

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Proposal to Require Greater Involvement in Private Placements by Broker-Dealers

FINRA recently proposed amendments to Rule 5122 which would increase Broker-Dealer compliance responsibilities with respect to private placements in which the Broker-Dealer “participates.”  FINRA noted that the vast majority of private placements currently remain outside the purview of the rule as it is currently written.  As FINRA’s stated intention is to increase investor protection, the amended rule is designed to combat fraud and abuse, by expanding oversight to all private placements in which a FINRA member participates, subject to certain exemptions.

Current FINRA Rule 5122

In general FINRA Rule 5122 requires a FINRA member firm which acts as the issuer of a private placement to adhere to the following requirements:

  • the private placement offering document must include the indended use of offering proceeds, expenses, and the amount of selling compensation to be paid to the broker-dealer and its associated person;
  • 85% of the offering proceeds must be used for the business purposes described in the offering documents (i.e. only up to 15% of the proceeds from the offering may be used to pay for offering costs, discounts, commissions or any other cash or non-cash sales incentives); and
  • the offering documents must be submitted to FINRA for review at or prior to the time the offering documents are provided to any prospective investor (but the firm does not need to delay the offering until it receives a “no-objections” letter from FINRA).

There are various exemptions available under the rule including if the private placement offering is sold to:

  • Institutional accounts
  • Qualified purchasers
  • Qualified institutional buyers
  • Investment Companies
  • Banks
  • Employees of the issuers

In addition, certain private placements are not subject to the rule.

Major Part of Proposal

In general the major part of the proposed amendment is to apply the requirements of the rule to broker-dealers who “participate” (within the meaning of FINRA Rule 5110(a)(5), see below) in a private placement offering as opposed to only those broker-dealers (and control entities) who act as the cheap celebrex online issuer in a private placement.  The proposal will significantly expand the scope of the current rule – third-party marketers who enter into selling arrangements with respect to private fund interests will now be subject to greater oversight with respect to these arrangements.

Participation

Rule 5110(a)(5) defines “participation” as the following:

Participation in the preparation of the offering or other documents, participation in the distribution of the offering on an underwritten, non-underwritten, or any other basis, furnishing of customer and/or broker lists for solicitation, or participation in any advisory or consulting capacity to the issuer related to the offering, but not the preparation of an appraisal in a savings and loan conversion or a bank offering or the preparation of a fairness opinion pursuant to SEC Rule 13e-3.

The proposal also would remove the wholesaling exemption (i.e. selling through affiliated broker-dealers) for member firms.

Conclusion

It is not clear now how this would affect the business of third-party marketers and whether this will have a chilling affect on selling agreements.  This proposed amendment also highlights FINRA’s aggressive expansion of regulatory oversight.

If you have specific comments on the proposal, especially with respect to certain elements (investor protection, filing requirements, burdens/efficiencies, 85% of offering proceeds go to the use of proceeds), you should submit comments on the proposal by March 14, 2011

For more information, please see FINRA Regulatory Notice 11-04.

Other good information for broker-dealers FINRA Regulatory Notice 10-22.

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Bart Mallon is an attorney focused on the investment management industry and provides regulatory and compliance services to the broker-dealer community through Cole-Frieman & Mallon LLP.  He can be reached directly at 415-868-5345.

Series 79 Training Materials | Series 79 Study Guide

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Information on Study Materials and Classes for Series 79 Exam

One of the inquires I receive most often about the Series 79 exam involves study materials.  As of right now I have not heard of any groups who have produced a study guide or other materials for this exam.  I know that both Kaplan and STC are working on producing exam study guides and other materials.  STC in particular has been moving forward very quickly with their materials.  The information below was prepared by Gary Fox of the Securities Training Corporation. and outlines the products which they will be introducing over the next couple of months.  We will continue to publish information on Series 79 products as they are released.

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FINRA began administering the Examination on Monday, November 2. As with all other FINRA Examinations, there is little or no guidance as to how topics are being tested other than the outline.

STC’s Series 79 Training Manual and Practice Examinations will be available in December. The Manual will be in printed format, the Practice Examinations will be available in online format.  We will be offering live and virtual training classes starting in January, which will give you the opportunity to complete your reading before classes begin. We strongly recommend attending the class, particularly if you have no prior experience with FINRA Examinations.

We would also like to remind you of the opt-in provisions FINRA offers with the Series 79. If you hold any one of the following registrations-Series 7, 17, 24, 37, 38, or 62, you do not need to sit for the Series 79, provided you file the appropriate opt-in forms with FINRA. You have until May 2 to take advantage of the opt-in provision. We offer training for all registrations.

If you do not hold any of these registrations, and do not want to wait until December for our training program, you could take any one of the previously mentioned examinations, opt-in to the new FINRA registration category, and bypass the need to sit for Series 79. As a reminder, STC does not offer guidance as to which registrations may be appropriate for your firm. Please contact your compliance department or legal counsel for proper registration and the procedure for opting in.

You can sign up for updates regarding our Series 79 Training Program and get more information about all of our programs and your options by visiting www.stcusa.com.

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Other related hedge fund law articles include:

Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs Hedge Fund Law Blog and can be reached directly at 415-868-5345.

Series 79 Opt In Period Begins

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Investment Banking Representative Exam Goes Live

Today marks the first day that current Series 7 licensed representatives of BDs who engage in “investment banking activities” can opt in to the Series 79 license.  Current Series 7’s will need to talk with their compliance department who will be able to complete a Form U4 update for the rep.  According to a FINRA representative I talked with last week, the opt in process will be very easy – essentially the compliance person for the BD will go into the CRD system, check the Series 79 box for the appropriate BD reps and then submit the revised U4 to FINRA.

Reps who engage in investment banking activities should make sure that they have opted in before May 3, 2010 or they will be required to take the exam which is 5 hours long (175 multiple choice questions).

Series 79 Articles

  • Regulatory Notice 09-41 – this article reprint’s FINRA’s notice to members.  Notice includes: background and discussion on exam, discussion of the opt in period, information on the training program exception, information on requirement for principals, outline of content, registration procedures, effective date and FAQs.
  • Series 79 Content Outline – FINRA’s content outline for the new exam.  Provides an overview of the major categories and sub-categories which will be tested.
  • Series 79 Questions and Answers – in this article we address some of the questions which have been posed to us regarding the new investment banking exam.

Other related hedge fund law articles include:

Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs Hedge Fund Law Blog and can be reached directly at 415-868-5345.

Series 79 Questions and Answers | Investment Banking Exam

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Q&A For New FINRA Exam License

We have fielded a number of questions regarding the new Series 79 exam for investment banking professionals.  We are creating this question and answer page as a service to our readers.  We will attempt to answer questions as best as possible and our understanding the 79 exam license and the way it will be utilized in practice will develop over time so we expect this resource to become more valuable over time.  Please help us to make this a valuable resource by adding your questions, responses or comments below.

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Question: While the series 79 makes sense in allowing investment bankers to focus on more pertinent test questions,  do the principal requirements for a boutique (i.e. 3 person) investment banking shop remain the same.  In other words,  is a small shop doing only investment banking still required to  be a BD with series 24 and series 27 registered principals which are tested extensively on managing a full Reg Rep not a Ltd Rep as in series 79?  Thanks!

Answer: I believe you are asking whether a small BD, which is only engages in investment banking activities, needs to continue to have a General Securities Profession (Series 24) and a Financial and Operations Principal (Series 27) – if so, then yes.  Additionally, such a firm will need to make sure that the Series 24 licensed principal also has a Series 79 license.  Generally all Series 24s will have the Series 7 as well so the Series 24 principal will need to opt-in to the Series 79 license prior by May 3, 2010.

To opt-in, a Series 7 licensed representative or principal will need to amend their Form U4 to request the Investment Banking representation.  The opt-in period will not begin until November 2, 2009 and will run until May 3, 2010.  After May 3, 2010, if a Series 7 licensed individual has not opted-in to the Series 79, then the individual will need to take the exam in prior to participating in investment banking activities.  The Form U4 will be amended to include this new registration category.

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Question: I have been a business brokers in [state] under the Real Estate license. Will I be required [to have] a Series 79 license in order to continue my [business] broker practice whereby assets are sold through every transaction?  Thanks.

Answer: This question is basically asking whether a business broker will need to be registered as a broker-dealer if the broker is only advising on the sale of assets (and not the securities of a company).  This question is fact specific and the answer will depend on the specific facts of the situation and the various state laws which may be implicated.  You should discuss this issue with an attorney.

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Please contact us if you have any questions or would like to start a hedge fund. Other related hedge fund law articles include:

Bart Mallon, Esq. runs hedge fund law blog and has written most all of the articles which appear on this website.  Mr. Mallon’s legal practice is devoted to helping emerging and start up hedge fund managers successfully launch a hedge fund.  If you are a hedge fund manager who is looking to start a hedge fund, or if you have questions about the Series 79 or investment banking activities, please call Mr. Mallon directly at 415-296-8510.

Series 79 Exam Available November 2, 2009

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FINRA Announces Date of First Series 79 Exam

The new investment banking exam, the Series 79, will be available for those first new test takers on November 2, 2009 at any of the FINRA testing centers (Pearson and Prometric).  In addition to the test date announcement, FINRA also published a Series 79 Content Outline which seems to be very comprehensive.  We have provided an overview of the exam below and will continue to bring you updated information on this exam.

Also, please note that right now we do not know of any groups who have completed a Series 79 exam study guide, but we have had informal conversations with representatives from both STC and Kaplan – these representatives have stated that they are currently working on developing such a study guide which should be available soon.  We will let you know when these study materials become available.

Series 79 Overview

According to FINRA, the following are the key stats for the Series 79 exam:

  • Questions:  175 multiple choice questions (plus 10 pre-test, non-graded questions)
  • Time:  5 hours testing time
  • Eligibility:  FINRA member firm must sponsor the candidate
  • Application:   Submission of Form U-4 through Web CRD
  • Purpose:  This examination qualifies an individual to advise on or facilitate debt or equity offerings through a private placement or public offering or to advise or facilitate mergers or acquisitions, tender offers, financial restructurings, asset sales, divestitures or other corporate reorganizations or business combination transactions.

FINRA’s Stated Exam Purpose

The Series 79 Examination is designed to assess the competency of entry-level investment bankers. As a qualification examination, it is intended to safeguard the investing public by seeking to measure the degree to which each candidate possesses the knowledge, skills and abilities needed to perform the major functions of an entry-level investment banker. Candidates should note that the duties and functions of the investment banker must be performed in accordance with just and equitable principles of trade, federal and state laws, and industry regulations. Furthermore, it is the responsibility of the candidate to be aware of changes in current legislation, regulation and policy. A registrant who violates industry regulations is subject to disciplinary action, including censures, fines, suspension, and permanent loss of registration.

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Please contact us if you have any questions or would like to start a hedge fund. Other related hedge fund law articles include:

Bart Mallon, Esq. runs hedge fund law blog and has written most all of the articles which appear on this website.  Mr. Mallon’s legal practice is devoted to helping emerging and start up hedge fund managers successfully launch a hedge fund.  If you are a hedge fund manager who is looking to start a hedge fund, or if you have questions about the Series 79 or investment banking activities, please call Mr. Mallon directly at 415-296-8510.