On December 11, 2017, Lawrence Cohen, of Gordon Rees Scully Mansukhani's Phoenix and New York offices, received a response to his request for guidance from the Financial Industry Regulatory Authority (FINRA) on a novel question for the securities industry that addresses the use of electronic attestations for compliance with FINRA’s rules governing initial public offerings (IPOs).
ClickIPO Securities, LLC provides subscribers with an app that permits them to receive allocations of IPOs from broker-dealers. The federal E-Sign Act provides that a binding electronic signature, even in the form of a checkmark or other symbol, may demonstrate a person’s intent to execute (sign) a document. The FINRA Guidance Letter agrees that the electronic attestation (“click the box”) process can be utilized for purposes of FINRA’s New Issue Rules, subject to compliance with SEC and FINRA requirements set forth under FINRA Rules 5130 and 5131.
FINRA Rule 5130 imposes “Preconditions for Sales” of IPOs, aimed especially at FINRA member firms and their associated persons who seek to take advantage of their insider positions to buy IPO shares. Rule 5131 restricts the practice of allocating IPOs as inducements for business ("spinning"). FINRA’s staff indicated that the written representations required by Rules 5130 and 5131 (traditionally supported by written questionnaires) “may be obtained electronically through a mobile application,” subject to compliance with “SEC and FINRA guidance regarding the use of electronic communications” and the satisfaction of the Rules’ requirements.
The staff noted that it would not generally address the “permissibility of the use of [the app] for offerings,” since this issue arises under the Securities Act of 1933 and is beyond the scope of the guidance.
The staff required that the app’s content must be consistent with Rules 5130 and 5131 and “sufficient for the subscriber to understand the facts as to which he or she is representing.” The app’s explanations must allow each subscriber to determine its eligibility to obtain IPOs (by understanding the categories of “restricted persons”). The app must sufficiently explain (a) the concept of “beneficial owner” as an executive officer or director or a person “materially supported” by the latter (and if so, the companies on whose behalf the executive or director serves), and (b) the conditions for meeting the exception for “unaffiliated private funds.” These requirements are met in this circumstance by providing links to the Rules and requiring the user to acknowledge via a “checkbox” that he or she has read and understood the Rules before proceeding with a buy order. The staff also said that it is the responsibility of the Broker-Dealers who license the use of the app from ClickIPO to determine whether the information given to their customers (the app’s users) allows them to “make a reasonable attestation” regarding the provisions of Rules 5130 and 5131.
The guidance will be posted at www.FINRA.org/interpretive-letters. To learn more about this interpretation, contact Mr. Cohen at 602-794-2485 or firstname.lastname@example.org.
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