As part of a retrospective review, FINRA requested comments on FINRA Rule 5250 (the “Rule”), which generally prohibits a member firm from accepting payment from an issuer or its affiliates or promoters in exchange for making a market in the issuer’s securities. The rule prohibits a member or associated person from accepting payment or other considerations from an issuer or its affiliates and promoters, except for (i) payment for bona fide services, (ii) reimbursement of payments for SEC or state registration fees and listing fees imposed by a self-regulatory organization, and (iii) payment expressly provided for under the rules of a national securities exchange.
FINRA noted that the Rule was implemented to prevent conflicts of interest that may arise from payments for making a market in an issuer’s securities. FINRA is seeking input in several areas, including:
- the effectiveness of the Rule, the impact of market changes on the need for the Rule, and alternative approaches to accomplish the goals of the Rule;
- experiences with the implementation of the Rule, including ambiguities and compliance challenges;
- the economic impact and unintended consequences of the Rule; and
- ways to improve the Rule and related interpretations and administrative processes.
Comments must be received by January 29, 2018.
Lofchie Comment: On its face, FINRA Rule 5250 seems common-sensical. However, given the high costs of making a market in securities, and reports that there are few firms that are willing to go to the effort and expense in making markets in the securities of small issuers, it may be appropriate to allow issuers to provide a broker-dealer some reward for being willing to commit capital to make a market in the issuer’s stock, particularly if the fact of the payments and perhaps the amount and conditions were fully disclosed. Certainly it is an idea worth exploring if the regulators wish to encourage firms to provide liquidity to small issuers.