The Financial Industry Regulatory Authority (“FINRA”) recently published Regulatory Notice 16-08 to provide guidance to member firms regarding the contingency offering requirements of SEA Rules 10b-9 and 15c2-4 and to remind broker-dealers of their responsibility to have reasonably designed procedures to ensure compliance with these rules. The three-part notice defines best efforts contingency offerings, summarizes the responsibilities of broker-dealers participating in a best efforts contingency offering and outlines the requirements for handling investor funds until the contingency is met.
FINRA defines a “contingency offering” as a “best efforts offering subject to the satisfaction of an underlying condition”. These are most often either “all-or-none” or “part-or-none” offerings and must have a provision for the prompt return of investor funds if the contingency is not met by the specified date. The notice stresses the importance of proper handling of customer funds depending on the member firm’s minimum net capital requirements and affiliation with the issuer. Funds should either be deposited into a separate bank account or transmitted to an escrow agent by noon of the next business day and must be kept segregated at least until the contingency us met. It’s important to note that even firms with a $250,000 minimum net capital are required to use an escrow agent if they are affiliated with the issuer of the offering. Lastly, firms must make sure that investor funds are refunded promptly in the event that the contingency is not met. Firms should review the requirements of SEA Rules 15c3-1, 15c2-4 and 10b-9 to ensure that they are in compliance.
The notice also reminds firms of their responsibility to perform a reasonable investigation including a review of the contingency terms (such as any agreement and disclosure of the contingency by the issuer and any inconsistencies between the escrow agreement and the offering document). Any contingency changes should be addressed by the participating member firm to ensure compliance with SEA Rule 10b-9.
To summarize, firms should take some time to make sure that they understand all of the requirements of the rules referenced in this notice (full notice can be found HERE) to avoid the common violations which prompted its publication.
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