Finra Corporate Finance Committee

The FINRA Corporate Financing Department plays a crucial role in safeguarding investors and maintaining market integrity by reviewing underwriting terms in public offerings of securities. This review process focuses on ensuring fairness and reasonableness in compensation paid to underwriters and other participants involved in the offering. The overarching goal is to prevent excessive or unfair arrangements that could disadvantage investors or distort market efficiency.

The cornerstone of this oversight is FINRA Rule 5110, the Corporate Financing Rule. This rule mandates that FINRA members acting as underwriters or participating in the distribution of securities must file relevant offering documents with the Corporate Financing Department. These filings typically include the registration statement, underwriting agreement, and any other documents pertinent to the underwriting process.

Upon receiving the offering documents, the Department undertakes a thorough review of the underwriting terms. The examination covers a wide array of factors, including the gross spread (the difference between the price paid to the issuer and the price offered to the public), the type and amount of compensation received by the underwriter, and any potential conflicts of interest.

The Department pays particular attention to arrangements that could be considered "unfair" or "unreasonable." Examples of such arrangements include excessive discounts, warrants with unfavorable terms, and disproportionate expense allowances. The Department also considers the overall risk associated with the offering and the prevailing market conditions when assessing the reasonableness of the underwriting compensation.

Based on its review, the Corporate Financing Department may issue a "no objections" letter, indicating that it finds the underwriting terms to be fair and reasonable. Conversely, if the Department identifies potential issues, it may issue a "disapproval" letter, preventing the offering from proceeding until the concerns are adequately addressed. This process may involve negotiations between the underwriter and FINRA to modify the underwriting terms to achieve a more equitable arrangement.

The Department's oversight extends beyond traditional initial public offerings (IPOs). It also reviews offerings of debt securities, secondary offerings, and private placements that meet certain criteria. This comprehensive approach ensures that a wide range of offerings are subject to scrutiny, enhancing investor protection across various segments of the market.

The Corporate Financing Department also plays a crucial role in providing guidance and interpretation of FINRA Rule 5110 to member firms. This guidance helps firms understand their obligations under the rule and promotes consistent application of the regulations. This proactive approach fosters compliance and minimizes potential violations.

In summary, the FINRA Corporate Financing Department serves as a critical gatekeeper, ensuring fairness and reasonableness in underwriting compensation in public offerings. By diligently reviewing underwriting terms and enforcing FINRA Rule 5110, the Department protects investors, maintains market integrity, and promotes a level playing field for all participants in the securities markets.