FINRA to "Modernize" Capital Formation Rules
Commentary by Steven Lofchie
FINRA requested comment on "modernizing" current rules, guidance and process relating to capital formation.
FINRA seeks input on rules governing "capital acquisition brokers," the production of investment research and the rules that member firms seek permission from—or file reports with—FINRA as to various types of offerings.
FINRA explained that "capital acquisition brokers" ("CABs") are a special type of broker-dealer subject to somewhat lesser regulation and strict limits on the types of activities in which they may engage—generally selling new issue unregistered securities to institutional investors. FINRA asked whether these firms should be permitted to engage in a broader range of activities.
FINRA said that the production of investment research is subject to regulatory requirements that raise the cost and diminish the profit incentive to write research. FINRA asked how these rules might be amended.
As to distribution procedures, FINRA asked for comment on the sale of direct participation programs and about the processes for obtaining FINRA approval for both public offerings (the review of underwriting compensation) and for offerings that may be subject to a conflict of interest.
Commentary
There is no area of financial regulation that is so in need of reduced regulation as that governing of the production of investment research. Investment research, which is a necessity for strong capital markets, has been treated by the SEC and FINRA as an inherently suspect activity. As a result, they have imposed onerous regulations that both made it more expensive to produce and to provide less of a benefit (profit motive) for it to be produced.