7.1.6. Conflicts of Interest
A firm that wishes to be a distribution participant (whether an underwriter or selected dealer) must comply with FINRA’s conflict-of-interest rules for participants in an offering. These are different, stricter rules than FINRA’s ordinary conflict-of-interest rules for firms that merely buy and sell for customers on the secondary market. For purposes of participating in an offering, a conflict of interest includes any of the following:
• The member is the issuer of the securities.
• The issuer controls, is controlled by, or is under common control with the member or an associated person of the member (e.g., the same third party owns 10% or more of the member firm and the issuer, an officer of the member firm sits on the board of the issuer, etc.).
• At least 5% of the net offering proceeds, not including underwriting compensation, is to be directed to or used for the benefit of the member or its affiliates or associated persons.
• As a result of the offering and any related transactions, the member will be an affiliate of the issuer, the issuer will become a member or broker-dealer subsidiary, or the member will become publicly owned.
If there is a conflict of interest, the firm may only participate in the offering if the conflict of interest is prominently dis