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.
Disclosure of 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
Notification Requirements for Offering Participants
Syndicate managers must notify FINRA of:
- Syndicate covering transactions
- Penalty bids
- Stabilizing activities
- The date and time of initiation and termination of stabilizing bids
- Overallotment and syndicate short covering transactions
These notifications ensure FINRA can monitor for potential manipulation during distributions.
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. The exam tests this customer-confusion scenario.
Tape Recording by Certain Firms
- Known as the "taping rule"
- Requires certain firms to tape-record all telephone conversations relating to the firm's business
- Applies to firms that employ a high percentage of registered persons from disciplined firms
- Designed to provide a compliance tool for firms with a higher risk profile
Trust Indenture Act of 1939
- 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 $50 million) come from the separate Regulation A offering exemption, not from this Act.