Financial Services Alert - January 18, 2011

On January 11, 2011, FINRA published a regulatory notice, FRN 11-04, requesting comment on proposed amendments to Rule 5122, currently entitled “Private Placements of Securities Issued by Members.”  The rule would be amended to apply to all private offerings in which a FINRA member firm participates.  With one exception, the exemptions now available under the rule would be available under the amended rule.  The exemption for an offering by a control person of a member acting solely in a wholesaling capacity would be deleted.

Rule 5122 has three basic requirements:

• The member firm must provide a disclosure document or term sheet to each prospective investor disclosing the intended use of proceeds, the offering expenses and compensation to be paid to participating broker-dealers;
• The disclosure document must be filed with the FINRA Corporate Financing Department within ten days after first use; and
• No more than 15% of the offering proceeds may be used to pay offering expenses and commissions, with the remainder to be used for the business purposes disclosed in the offering material.

FINRA proposes to amend the rule to require that the offering material also disclose, if applicable, the nature of any affiliation between the issuer and any participating broker‑dealer.  The definition of “affiliate” in Rule 5122 would adopt the definition of “control” as used in Rule 5121 (Public Offerings of Securities with Conflicts of Interest).  That definition is much broader than the definition of “control” currently used in Rule 5122 or elsewhere, and includes beneficial ownership by one person of 10% or more of the outstanding common equity, preferred equity or subordinated debt of another person.

Comments on this proposal are due by March 14, 2011.  If FINRA decides to go forward with the rule amendment, its next step will be to make a rule filing with the SEC, at which time there will be a second opportunity to comment.

The banking industry has been sharply critical of the Financial Crimes Enforcement Network’s (“FinCEN”) proposed rules (the “Proposed Rules”) to broaden the reporting obligations of banks and money transmitters for cross-border electronic transmittals of funds (“CBETFs”).  Comment letters from the industry have attacked the proposal on various grounds, including that the Proposed Rules are overbroad and that FinCEN is not technologically prepared to utilize the data which would be provided by banks under the Proposed Rules.

Under the Proposed Rules, which were described in the October 5, 2010 Alert, certain banks would be required to furnish FinCEN with (1) copies of transmittal orders or advices (or equivalent information in a format to be developed by FinCEN) for CBETFs sent to or received from foreign financial institutions and (2) an annual report that provides the account numbers for accounts that transmitted or received a CBETF and the U.S. taxpayer identification numbers for the corresponding accountholders.  The Proposed Rules would also require certain money transmitters to submit reports regarding CBETFs of $1,000 or more sent to or received from foreign financial institutions. 

The banking industry’s main criticism of the Proposed Rules is that requirements for annual reporting of taxpayer identification information for accountholders engaged in cross-border electronic transfers are an unnecessary invasion of privacy that would not collect useful information.  In addition, the industry commented that the Proposed Rules would require banks to submit a large volume of reports, but that the information would not provide FinCEN with more meaningful data than it could collect through more limited reporting requirements.  Industry commenters also pointed to the fact that FinCEN exceeds current FinCEN data management capabilities and fails to impose adequate standards on law enforcement for data use accountability or security.  Other commenters stated their views that the Proposed Rules exceed the limited rulemaking authority provided to FinCEN by Congress in Intelligence Reform and Terrorism Prevention Act of 2004 by imposing overly broad reporting requirements.  The Alert will continue to monitor developments regarding the Proposed Rules.

The FDIC adopted a final rule (the “Final Rule”) amending its deposit insurance regulations to include Interest on Lawyers Trust Accounts (“IOLTAs”) in the definition of “non-interest bearing transaction account” so that funds in IOLTAs will receive unlimited deposit insurance coverage during the period from December 31, 2010 through December 31, 2012.  The FDIC noted that the coverage for IOLTAs is separate from, and in addition to, insurance coverage provided to a depositor for other FDIC-insured accounts.  The Final Rule will become effective on the date it is published in the Federal Register.