Corporate Financing Rule 5110 Frequently Asked Questions (FAQ)

Filing Requirements

1. Rule 5110(a)(4)(A)(iii) requires filing marked pages showing changes to documents previously filed if there are changes that impact the underwriting terms and arrangements. Does this provision apply to registration statement amendments?

Yes. 

2. With respect to Rule 5110(a)(4)(A)(iii), what are examples of changes in documents that could impact the underwriting terms and arrangements?

Examples of changes in documents that could impact the underwriting terms and arrangements include an increase or decrease to the anticipated offering size, changes to the method of distribution and changes to the participating members or the services for which members are engaged.

Shelf Offerings

1. What is the filing process for shelf offerings?

Rule 5110(a)(4)(E) requires filers to file the registration statement number of the base shelf offering. FINRA will access the base shelf registration statement, amendments and prospectus supplements through EDGAR and populate the information necessary to conduct a review. Once the required registration statement number is filed, FINRA will provide a No Objections Letter. FINRA’s review of documents and information obtained from EDGAR and any additional materials FINRA requests pursuant to Rule 5110(a)(4)(E)(ii) will occur on a post-takedown basis. 

Definitions

1. Supplementary Material in Rule 5110.01(b)(12) provides that securities acquired under an employee benefit plan that qualifies under section 401 of the Internal Revenue Code or a “similar plan” are not considered underwriting compensation. What type of plan would qualify as a “similar plan,” in addition to those specifically referenced in the Supplementary Material?

A “similar plan” could include a written compensatory benefit plan for directors and employees that provides comparable grants of securities to similarly situated persons (e.g., a written compensatory benefit plan that provides comparable grants of securities to all qualifying employees) and is not “Underwriting Compensation,” as defined in Rule 5110(j)(22). A “similar plan” would not include a compensatory benefit plan that was developed or structured to circumvent the requirements of Rule 5110.   

Fees and Compensation to Foreign Affiliates

1. Can a member divide compensation with a foreign affiliate in a global offering in a manner that keeps it from being counted as underwriting compensation subject to Rule 5110?

Yes. If the member can separately allocate the compensation received by the non-U.S. broker-dealer for the non-U.S. portion of the global offering, FINRA would consider that separately allocated underwriting compensation to be outside the scope of Rule 5110 and not subject to the requirements of Rule 5110.

Valuation Method for Underwriting Compensation

1. If a security is dually listed on a foreign exchange that qualifies as a "designated offshore securities market" under Securities Act Rule 902(b), and also trades on a U.S. exchange, which price should be used to value underwriting compensation?

While FINRA Rule 5110(c)(2), as amended, provides a simplified method for valuing securities received as underwriting compensation, Rule 5110(a)(4)(B)(ii) continues to require an estimate of the maximum value for each item of underwriting compensation. Accordingly, a member must use and disclose the price that results in the maximum compensation value of the securities acquired.

For example, consider a member that acquires securities at $9 per share that are listed on both a U.S. exchange and a foreign exchange. The closing price on the designated offshore securities market is equivalent to $10 per share, the closing price on a U.S. registered national securities exchange is $10.10 per share, and the public offering price is $10.05 per share. Consistent with Rule 5110(a)(4)(B)(ii), a member must use the U.S. closing price of $10.10 per share as it results in the maximum value for the securities included as underwriting compensation.

2. If a security trades on a U.S. national securities exchange but has no closing price on the specific date of acquisition (e.g., due to a trading halt or an absence of trades on that date), what price should be used for valuation purposes?

If no closing price is available, Rule 5110, as amended, requires a member to use the public offering price per security.