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ADISA Submits Comments to FINRA Regarding FINRA Notice 23-09 (Rules Impacting Capital Formation)

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ADISA responded to FINRA’s request for comment on FINRA Rules impacting the capital formation process contained in FINRA Notice 23-09, and in anticipation of the response, surveyed our membership to identify the most important changes within these rules which would assist with the capital formation process. The comments below reflect the feedback.

FINRA Rule 2210 – Communications with the Public
FINRA Rule 2210 sets forth the requirements for broker-dealer communications with the public, including retail and institutional communications and correspondence. As stated in Notice 23-09, in Notice 17-06, FINRA requested comment on expanding the exemptions to include “(iv) A customized hypothetical investment planning illustration that projects performance of an asset allocation or other investment strategy and not an individual security, provided that: a. there is a reasonable basis for all assumptions, conclusions and recommendations; and b. the illustration clearly and prominently discloses: (I) that the illustration is hypothetical; (II) that there is no assurance that any described investment performance or event will occur; and (III) all material assumptions and limitations applicable to the Illustration.”

ADISA believes that real estate funds should be considered an investment product which operates like an asset allocation or other investment strategy. There is ample historical real estate data which could be utilized and provided to investors which informs the performance projections of such investments, including by asset class, geography, market rents, occupancy, etc. Other types of investments which have similar historical data and anticipated performance should be considered as well.

FINRA Rule 2310 – Direct Participation Program
FINRA Rule 2310 sets forth requirements surrounding investments which are publicly offered direct participation programs (DPPs) and with regard to certain requirements, publicly offered REITs.

Numerous FINRA firms rely, in part, on third-party due diligence firms to review and report on numerous aspects of DPPs and REITs, including the disclosure contained in the offering materials. The utilization of third-party due diligence firms is contemplated elsewhere in FINRA guidance (i.e. Notice 08-35, Footnote 6) and ADISA membership feels it would be beneficial to include guidance on how member firms can rely on third-party due diligence for purposes of complying with subsections (A) and (B) within Rule 2310(b)(3).

FINRA Rule 5110 – Corporate Financing Rule – Underwriting Terms and Arrangements
FINRA Rule 5510 sets forth filing, disclosure, valuation and other terms concerning underwriting compensation in public offerings.

ADISA membership expressed the need for guidance on what is considered a reasonable underwriting compensation limit. By not providing a limit, in the form of percent of offering proceeds or otherwise, this has the result of potentially lengthening the FINRA review process by way of additional comments and responses, increasing costs to issuer and thus to investors, and lengthening the time it takes to go to market with offerings.

ADISA membership also expressed that due diligence costs under Rule 5110 should not be considered underwriting compensation, and in the alternative, recommends that due diligence costs be bifurcated in a manner similar to Rule 2310.

ADISA membership also voiced that FINRA impose a time frame with which FIRNA would provide comments/responses to Rule 5110 filings similar to that of the SEC.

General Comment – Not Tied to a Specific Existing FINRA Rule
ADISA membership expressed that it would be extremely helpful to have FINRA correspondence regarding offering materials required to be filed with FINRA be publicly available similar to SEC comment letters’ availability on EDGAR.

The letter, which was drafted by ADISA’s Legislative & Regulatory Committee Co-Chairs John Grady, ABR Dynamic Funds, and Catherine Bowman, The Bowman Law Firm, was signed by ADISA’s President Michael Underhill, Capital Innovations.

Read the letter in its entirety here.