FINRA Amends Rules 5122 and 5123 Filing Requirements to Include Retail Communications that Promote or Recommend Private Placements

Publish Date

Type

Compliance Alert

Topics

  • Performance
  • Compliance

On July 15, 2021, FINRA issued Regulatory Notice 21-26 ("RN 21-26") to announce new amendments to Rules 5122 and 5123. Under the revisions, broker-dealers must file retail communications that promote or recommend private placement offerings subject to the rules’ filing requirements as of October 1, 2021.

Background

Rule 5122 applies to private placements of unregistered securities issued by a firm or its control affiliate. Rule 5123 requires firms to file with FINRA any private placement memorandum (“PPM”), term sheet, or other offering document, including any amendments used in connection with a private placement of securities within 15 calendar days of the date of first sale. Both rules predominantly apply to private placements sold to retail investors as a result of exemptions.

New amendment requirement

Beginning on October 1, 2021 broker-dealers will be required to file any retail communications that promote or recommend private placement offerings with FINRA. These filings must be completed by the date the firm files the associated private placement memorandum, term sheet, or other offering document under Rules 5122 and 5123.

In the past, many firms have filed additional retail communications at the same time as their required PPMs or term sheets. Such additional communications have included web pages, slide presentations, pitch decks, one-page teasers, fact sheets, sales brochures, executive summaries, and investor packets. Now, any amendments to or exhibits added for such offering documents and retail communications must be filed with FINRA within 10 days of being provided to any investor or prospective investor. 

Reminder: Regulatory Notice 20-21

Firms should confirm their retail communications comply with FINRA’s Regulatory Notice 20-21 (“RN 20-21”), issued on July 1, 2020. This notice provides guidance to broker-dealers “when creating, reviewing, approving, distributing, or using” retail communications concerning private placement offerings. Please see ACA’s alert on RN 20-21 for more details. 

One of the most talked about changes under RN 20-21 is its interpretation of Rule 2210.  The interpretation allows marketing of an internal rate of return (“IRR”) for a portfolio investment and/or a fund that has realized and unrealized returns only if the IRR is calculated in a manner consistent with the CFA Institute’s Global Investment Performance Standards (GIPS®).  In response to this amendment, some FINRA members offering private placements have required private fund managers to provide legal representation attesting to their IRR calculations’ compliance with the GIPS as well as additional GIPS-required metrics. Please refer to ACA’s blog for more details.

How we help

ACA can assist firms depending on their varying degrees of risk tolerance. For firms considering or making a full transition to the GIPS standards, ACA offers the following services: 

  • GIPS Feasibility Study: This study quantifies the scope and effort required for a firm to become GIPS compliant, along with identifying any gaps that must be addressed to achieve compliance.
  • GIPS Compliance and Verification: ACA offers GIPS compliance consulting and verification services that provide clients with internal and external assurance of their GIPS compliance. 

For firms that choose not to transition fully to GIPS compliance, ACA offers the following services: 

  • Focused Performance Review: ACA provides guidance on ensuring that IRR calculations are consistent with the GIPS. We also provide insights on GIPS-required metrics and the associated calculation methodologies. As part of these services, ACA consultants conduct calculation methodology reviews and provide findings reports to help ensure that firms’ IRRs and multiples meet the RN 20-21 requirements. 
  • Independent Performance Certification: With this service, ACA provides an assurance letter stating that the firm’s IRR calculations and associated multiples satisfy the RN 20-21 requirements. 
  • Hourly Consulting: ACA offers blocks of hours for ad hoc performance consulting. 

Additional resources

Watch ACA's on demand webcast discussing the main areas of impact to broker-dealers, FINRA member placements agents, private placement issuers, and fund managers, including:

  • Overview of FINRA Notice 20-21 focusing on IRR guidance
  • Key differences between realized and unrealized IRRs and the impact of FINRA Notice 20-21
  • Overview of the GIPS standards, what they entail, and how they impact IRR calculations based on FINRA Notice 20-21
  • Emerging trends in issuer due diligence
  • Impact on compliance, finance, and performance departments

Watch Now

For more information

For more information on the FINRA rule change or ACA's performance services, please reach out to your ACA consultant or or contact us below.

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