This final section covers the remaining Financial Industry Regulatory Authority (FINRA) rules and federal laws that apply to offering participants: from disclosure obligations to networking arrangements and the Trust Indenture Act.
What Must Participants Disclose About Price and Concessions?
- Members participating in a selling agreement must disclose to other participating broker-dealers:
- The public offering price
- The concession
- The reallowance (if any)
- This ensures all participants in the distribution have access to the same compensation information
What Must Offering Participants Notify FINRA About?
Under FINRA's notification rule for offering participants, syndicate managers must notify FINRA of:
- The restricted-period determination (or that a distribution is "actively traded" and has none) and the pricing of the distribution
- The cancellation or postponement of a distribution for which restricted-period notice was already given
- Penalty bids and syndicate covering transactions in an offering of an over-the-counter (OTC) equity security: the intention beforehand, and confirmation with the date(s) of the activity within one business day of completion
The FINRA penalty-bid and covering notice is limited to OTC equity offerings. For any other offering, Regulation M requires prior notice of a penalty bid or syndicate covering transaction to the self-regulatory organization with direct authority over the security's principal market.
A stabilizing bid is handled differently. Under Regulation M, prior notice of a stabilizing bid goes to the market on which the bid is placed, not to FINRA with start-and-end times. These notifications let FINRA monitor for potential manipulation during distributions.
What Are the Rules for Networking Arrangements with Financial Institutions?
- Governs arrangements where a member conducts broker-dealer services on the premises of a financial institution (e.g., a bank)
- Must ensure customers understand that:
- Securities are NOT insured by the Federal Deposit Insurance Corporation (FDIC)
- Securities are NOT bank deposits
- Securities are NOT guaranteed by the bank
- Securities involve investment risk, including possible loss of principal
Exam Tip: Gotchas
When a broker-dealer operates inside a bank, customers may assume their investments carry the same protections as bank deposits. The bank-networking rule requires clear disclosure that securities are NOT FDIC-insured and NOT bank deposits.
Which Firms Must Tape-Record Their Calls?
- Known as the "taping rule"
- Applies to a "taping firm": one where registered persons formerly associated with a disciplined firm (a firm expelled from a self-regulatory organization, or barred by an SEC order, for sales-practice violations) within the last three years reach a size-based threshold:
- 5 to 9 registered persons: 40% or more
- 10 to 19 registered persons: 4 or more (a fixed count, not a percentage)
- 20 or more registered persons: 20% or more
- A taping firm must tape-record all telephone conversations between any of its registered persons and existing or potential customers, firmwide, not only the calls of the disciplined-firm hires
- Designed to provide a compliance tool for firms with a higher risk profile
Exam Tip: Gotchas
The 10-to-19-person tier uses a fixed head count of four, not a percentage. A 10-person firm with four registered persons from disciplined firms is a taping firm under that fixed count, even though the 40% figure applies to a different, smaller tier (5 to 9 persons).
What Does the Trust Indenture Act of 1939 Require?
- Applies to corporate debt securities offered to the public in excess of $10 million (issues of $10 million or less over a rolling 36-month period are exempt as small issues)
- Requires a formal trust indenture (agreement between issuer and trustee) to protect bondholders
- The trustee (usually a bank) acts as a fiduciary for bondholders
- The trust indenture spells out the rights of bondholders and the obligations of the issuer
Exam Tip: Gotchas
The Trust Indenture Act applies to corporate debt over $10 million, not equity. The trustee is a fiduciary for bondholders, separate from the issuer. The Act's own threshold is $10 million; larger figures you may see elsewhere (for example Regulation A's $75 million Tier 2 cap) are unrelated to this Act's $10 million threshold.