ADISA Submits Comment Letter to FINRA Regarding Regulatory Notice 17-14

Jul 18, 2017

ADISA responded to FINRA’s request for comment as set forth in Regulatory Notice 17-14, which addresses the aspects of operations and processes impacting capital formation currently governed by or expressed in various FINRA rules.

The various FINRA rules that apply to or otherwise involve capital formation are numerous; therefore, ADISA’s comments focus on those rules with particular application to the non-traded alternatives space, in particular:

  1. FINRA’s Funding Portal Rules;
  2. FINRA Rule 2310, applicable to Direct Participation Programs; and
  3. FINRA Rules 5122 and 5123, which have application to FINRA member firms when they are engaged in the private sale or placement of securities. 
Funding Portal Rules
ADISA believes that future generations will be more likely to invest in alternative investment products through crowdfunding and related market mechanisms. However, many broker-dealer ADISA members wonder if the increased use of Funding Portals will ultimately increase the number of firms effectuating crowdfunding strategies outside of FINRA’s FP rules and away from its oversight. An increase in the number and size of non-FINRA member distribution portals may act to put at a competitive disadvantage those who are subject to and abide by FINRA regulation, and ADISA strongly encourages careful and coordinated oversight among all agencies, while ensuring an adequate level of investor protection.
FINRA Rule 2310
FINRA’s Rule 2310 addresses investment programs which are core aspects to many of ADISA members’ offerings. While many of the Rule’s provisions are commendable, the Rule also appears to have several important and perhaps unintended consequences. Rather than simply promoting investor protection, the Rule’s substantive requirements have shaped and even in some ways determined the distribution-related structure and compensation arrangements associated with a large number of Investment Programs, such as non-traded REITs and BDCs. ADISA urges FINRA to consider replacing the Rule with one that permits broker-dealers, in conjunction with product firms, to determine what is fair and unreasonable, as well as how diligence is performed, etc.
FINRA Rules 5122 and 5123
Both Rules serve and were intended to establish requirements for information collection. In ADISA’s view, they have morphed into rules that now involve substantive FINRA staff review. And while the intent was to require dissemination of information, FINRA is now exercising independent judgement about the investment quality. ADISA believes this overreach should be acknowledged and curtailed.
The letter was authored and signed by ADISA President John Grady, DLA Piper. You can view the letter in its entirety here.