Series 22: Fairness Standard

Fairness Standard

The SEC’s Corporate Financing Rule encompasses many specific rules about how an underwriter or dealer-manager may charge its customers. The first rule is that underwriting compensation (the spread) must be fair and reasonable. All underwriters must submit their underwriting agreements to FINRA no more than one business day after filing them with the SEC or any state securities regulator so that FINRA may judge whether the fees seem fair. If the agreements do not need to be filed with another regulatory agency, the underwriters must submit the documents to FINRA at least 15 business days prior to the expected offering date. If FINRA finds no objection to the compensation, it will give an opinion of “no objection.” Note that FINRA will not judge the merit of the securities, and for this reason the underwriters cannot say that FINRA “approved” of the securities.

Spreads vary, as we have seen, depending on several factors. In determining whether a spread is fair and reasonable, FINRA relies on the following factors:

• The size of the offering. Larg