Firm Settles FINRA Charges for Disclosure Failures in Distribution Filings
Commentary by Glen Barrentine
An investment banking firm settled FINRA charges for failing to file documents in connection with public takedown offerings of securities following an initial shelf offering.
According to the AWC, the firm served as placement agent for a biotechnology company in connection with a $200 million "shelf" offering of securities and participated in seven public takedown offerings. FINRA said these offerings were conducted on a "best-efforts basis." FINRA stated that the firm received underwriting compensation in the form of "a commission, an expense fee, and varying allotments of warrants." FINRA found that:
- the firm "failed to file documents and information for two takedown offerings, and failed to timely file documents and information for another five takedown offerings;"
- the firm "did not disclose [private] warrants as 'underwriting compensation' in the underwriting or distribution arrangements section of prospectus supplements;"
- the firm's "WSPs did not designate a supervisor responsible for verifying that all filings and disclosures" or how compliance reviews should be conducted; and
- the firm failed in its supervisory obligations "to timely and completely file required documents and information with FINRA," and "to disclose all underwriting compensation in the offering documents as required."
As a result, FINRA determined that the firm violated FINRA Rules 5110 ("Corporate Financing Rule — Underwriting Terms and Arrangements"), 3110 ("Supervision") and 2010 ("Standards of Commercial Honor and Principles of Trade").
To settle the charges, the firm agreed to (i) a censure, (ii) pay a $100,000 fine and (iii) an undertaking requiring certification of the firm's supervisory system.
Commentary
The AWC serves as a reminder that shelf offerings are subject to FINRA's Corporate Financing Rule, FINRA Rule 5110. This rule imposes several obligations on FINRA members that participate in covered public securities offerings. These obligations include the making of timely filings with FINRA and the disclosure in the prospectus or similar document of each item of underwriting compensation received by the member. FINRA members that engage in public offerings are required to comply fully with FINRA's Corporate Financing Rule and, of course, must also have a supervisory system with respect thereto. This supervisory system must comply with FINRA Rule 3110, which means, at a minimum, it must be reflected and memorialized in written procedures and must also designate an appropriately registered principal with authority to carry out the relevant supervisory responsibilities.