Author: Morris Simkin

FINRA Rule 4370 requires member firms to create, maintain and annually review and, if necessary, update a business continuity plan (BCP) relating to an emergency or significant business disruption. FINRA recently published Regulatory Notice 21-44 (RN 21-44) setting forth its observations after reviewing firm BCPs resulting from the Covid pandemic.

Annual Testing. Rule 4370 doe not specify exactly what is to be done here. RN 21-44 suggested reviewing annually to include testing operations, business structure, and business locations.

Providing BCP To Customers at Account Opening. Member firms may meet by providing summary information about how the firm will address the [possibility of future significant disruptions, and may do so by using electronic media.

Triggering Events. While not required, FINRA indicated that including responses to a pandemic may be appropriate to include in a BCP.

Remote Work Arrangements. RN 21-44 suggested considering including in the BCP remote work arrangements.

FINRA Guidance. RN-21-44 lists a number of other Regulatory Notices and FINRA’s 2021 Report on Examinations and Risk Monitoring that firms may consider.

ISSUE: WHEN CAN YOU SOLICIT IN A PRIVATE PLACEMENT?

SEC Interpretations. SEC Rule 506(c) allows “general solicitations” — advertising, in private placements under Regulation D where all the purchasers are “accredited investors,” as defined in Rule 501. Private placements relying on Rule 506(b) can include up to 35 purchasers who are not accredited investors. However, Rule 506(b) offerings and private placements under the Securities Act’s private placement exemption cannot involve general solicitations—e.g. advertisements, articles, communications, seminars and meetings.

Substantive pre-existing relationship exception. In no-action letters and published interpretations the SEC staff has said that a broker is not making a general solicitation when, acting on behalf of an issuer in a private placement, it has established a pre-existing substantive relationship with a prospective investor. But, this relationship must be established before the broker-dealer starts participating in the securities offering.

When does the broker begin participating in the offering? In the recently settled FINRA action the private placement broker-dealer was assisting the issuer in conducting due diligence in anticipation of the offering and in preparing offering materials. While doing so the brokerage firm was contacting individuals with whom it did not have a relationship, qualifying them, and offering them interests in the private offerings. FINRA’s AWC sanctioning the broker-dealer cited the SEC interpretations for the principle that once the firm began working on the offering any contacts had to be limited to clients with whom it had a pre-existing substantive relationship. The argument that the substantive relationship was established prior to the “sale” violated the prohibition on general solicitation.

The Lesson. In an offering relying on Rule 506(b) and the Securities Act’s private placement exemption, the brokerage firm cannot contact prospects that are not existing clients with whom the firm has done its due diligence once the firm starts work on a private placement. Would a representation in the subscription documents by the purchaser that there was no general solicitation work? But there is no prohibition on general solicitations in an offering relying on Rule 506(c).

Contact me at msimkin@securitesregslawyer.com