Series 7: 12.4.2. FINRA Rule 5110—The Corporate Financing Rule

12.4.2. FINRA Rule 5110—The Corporate Financing Rule

FINRA’s Rule 5110 sets forth underwriting terms and arrangements. According to FINRA, it is “the principal rule regulating compensation to be received by FINRA member firms and associated persons participating in public offerings of securities. The rule obligates firms to observe high standards of commercial honor and just and equitable principles of trade while conducting business.”

The Corporate Financing Rule states that underwriting compensation (the spread) must be fair and reasonable. All underwriters must submit their underwriting agreements to FINRA at least 15 business days prior to the expected offering date so that FINRA may judge whether the fees seem fair. If FINRA finds no objection to the compensation, it will return an opinion of “no objection.” Note that FINRA will not judge the merit of the securities, and for this reason, the underwriters cannot claim that FINRA “approved” of the securities. In determining whether a spread is fair and reasonable, FINRA will rely on the following factors, as well as others it deems relevant.

• The offering proceeds (larger dollar amount offerings tend to have lower percentage spreads than lower dollar amount offerings)

• The amount of risk assumed by the underwriter and related persons, which is determined by:

◊ Whether the offering is being underwritten on a firm-commitment or best-efforts basis (firm-com