If you work in securities regulation, broker-dealer compliance, investment banking, or capital markets, FINRA’s latest regulatory push should be on your radar.
In January 2026, the Financial Industry Regulatory Authority (FINRA) filed a proposed rule change with the SEC to amend two key Capital Markets rules:
- FINRA Rule 5110 (the Corporate Financing Rule, governing underwriting terms and compensation in public offerings)
- FINRA Rule 5123 (governing private placement filing requirements)
These are not cosmetic edits. FINRA’s stated goal is to streamline compliance, reduce unnecessary regulatory burden, and support capital formation, while still maintaining investor protections and supervisory accountability.
This post breaks down:
- How Rules 5110 and 5123 work today
- What FINRA is proposing to change
- Why these amendments matter for broker-dealers, underwriters, and private placement participants
Understanding the Current Landscape: FINRA Rule 5110 (Corporate Financing Rule)
FINRA Rule 5110 is designed to ensure that underwriting terms in public offerings remain fair, reasonable, and transparent. It regulates the structure of deals by requiring firms to file offering materials and by limiting underwriting compensation.
Key Requirements Under the Current Rule
1) Filing Obligations
Firms participating in public offerings must file documents with FINRA for review, including:
- Registration statements
- Underwriting agreements
- Compensation estimates and disclosures
Timing is generally:
- No later than 3 business days after SEC filing, or
- 15 days before sales begin if no regulatory filing is required
Certain offerings are exempt, including some:
- Municipal securities offerings
- Shelf offerings under specific conditions
2) Underwriting Compensation Valuation
Compensation includes:
- Cash
- Securities
- Warrants
- Other economic benefits
Valuation depends on whether a “bona fide public market” exists.
- Non-convertible securities: valued based on market price vs. cost
- Convertible securities: valued using a formula involving offering price, exercise price, and market adjustments
- Securities cannot have indeterminate value
3) Exclusions and Lock-Ups
Some acquisitions are excluded from being treated as compensation, such as:
- Purchases by affiliates under strict criteria (ex: large managed funds)
- Certain institutional private placements
Securities treated as compensation are generally subject to a 180-day lock-up after the offering.
4) Prohibited Terms
Rule 5110 restricts terms considered unfair, including:
- Excessive underwriting compensation (subject to guidelines)
- Rights of first refusal longer than 3 years
- Payments for unaccountable expenses
Bottom line: Rule 5110 exists to prevent abusive underwriting practices while enforcing transparency and fair deal structuring.
What’s New? Proposed Amendments to FINRA Rule 5110
FINRA’s proposals build on feedback from industry participants and aim to modernize Rule 5110 without weakening protections.
Below is a simplified comparison of key changes.
Proposed Rule 5110 Changes (Current vs. Proposed)
Topic | Current Rule | Proposed Amendment |
Valuation of Securities | Uses “bona fide public market” test based on SEC Reg M criteria; limited to national exchanges | Simplifies valuation to closing market price from U.S. exchanges, designated offshore markets, or eligible OTC markets; removes “bona fide” test |
Compensation Exclusions | No explicit safe harbors for certain deal structures; relies on exemptions | Adds safe harbors for debt-for-equity exchanges, DPP/REIT capital investments, and non-convertible preferred securities |
Tail Fees | Termination fees and ROFRs are addressed; tail fees not clearly covered | Applies conditions to tail fees to ensure reasonableness and issuer protections |
Operational Clarity | Some areas require interpretation or staff guidance | Clarifies affiliate transfers, NAV treatment, and makes exclusions self-operating |
FINRA notes that many of these updates reflect exemptions FINRA staff has already been granting in practice — including 21 exemption requests between 2022 and 2024 on similar issues.
Benefits of Amending FINRA Rule 5110
FINRA states these changes will enhance rule efficiency and support capital formation. In practical terms, this could mean:
1) Faster Deals and Cleaner Valuations
Removing the “bona fide public market” test reduces uncertainty and interpretive disputes.
From 2022–2024, FINRA reviewed over 3,700 filings. Even small improvements in clarity could reduce review time, legal costs, and deal delays.
2) Better Support for Modern Capital Raising
Safe harbors for:
- Debt-for-equity restructurings
- DPP and REIT capital investments
- Preferred securities treated like debt
…make it easier for issuers to pursue financing strategies without triggering compensation issues.
3) Reduced Exemption Burden
Fewer case-by-case exemption requests means:
- Lower legal spend
- Less administrative friction
- Less delay in transaction timelines
4) Investor Protections Remain in Place
FINRA is not removing core safeguards, including:
- Disclosure expectations
- Arm’s-length requirements
- Lock-ups
- Oversight for higher-risk scenarios
Shifting Gears: Current FINRA Rule 5123 (Private Placement Filings)
While Rule 5110 focuses on public offerings, FINRA Rule 5123 is about private placements.
It requires member firms to file offering documents with FINRA within 15 days of the first sale, unless the offering qualifies for an exemption.
Key Requirements Under Current Rule 5123
Filing Basics
Firms must file:
- Private placement memoranda (PPMs)
- Term sheets
- Any retail communications used
If no documents were used, firms must file a notice instead.
Exemptions
Rule 5123 includes exemptions for sales to sophisticated purchasers, including:
- Institutional accounts
- Qualified Institutional Buyers (QIBs)
- Banks
- Certain accredited investor entities (ex: entities with >$5M assets under specific categories)
It also exempts certain product types such as:
- Short-term debt
- Variable contracts
- Registered investment companies
Confidentiality
FINRA treats filings as confidential and uses them for regulatory purposes only.
Good Cause Waivers
FINRA may grant waivers on a case-by-case basis.
FINRA reports that between 2022–2024, firms submitted over 8,400 filings, representing billions in proceeds, primarily to accredited investors.
Proposed Tweaks to FINRA Rule 5123
The proposed changes to Rule 5123 are narrower but still meaningful — and designed to align with SEC updates from 2020.
Proposed Rule 5123 Update
FINRA proposes expanding exemptions to include:
- Any entity with more than $5M in investments, not formed for the offering (SEC Rule 501(a)(9))
- Family offices with more than $5M in assets under management, directed by knowledgeable staff, and not formed for the offering (SEC Rule 501(a)(12))
FINRA rejected calls to exempt all accredited investors, keeping filings for retail accredited investors to preserve anti-fraud oversight.
Why the Rule 5123 Amendments Matter
These changes are focused on consistency and reduced burden:
1) Alignment With SEC Accredited Investor Standards
By syncing with the SEC’s expanded accredited investor framework, FINRA reduces confusion and inconsistent treatment.
2) Reduced Filing Burdens for Sophisticated Investors
Many private placements involve institutional or sophisticated entities. These exemptions reduce unnecessary filings while keeping FINRA’s ability to monitor retail-facing offerings.
3) Capital Formation Tailwind
Family offices and investment entities are increasingly central to private capital markets. Streamlining compliance encourages capital access without compromising oversight where it matters most.
4) Protections Stay Where Risk Lives
Retail accredited investors still trigger filings — preserving FINRA’s ability to detect red flags and misconduct.
Final Takeaway: A Step Forward for FINRA Capital Markets Regulation?
FINRA’s proposed amendments to Rules 5110 and 5123 reflect a broader trend in securities regulation:
Modernize the rules, reduce friction, support capital formation — but keep investor protections intact.
For broker-dealers, underwriters, and compliance teams, these changes could reduce administrative strain while improving predictability in:
- Underwriting compensation valuation
- Deal structuring
- Private placement filing requirements
The SEC comment period is open, and industry feedback may still shape the final rule.
The bigger question is: will this meaningfully accelerate deal activity — or will the burden simply shift elsewhere?
How MCG Consulting Can Help
MCG Consulting supports broker-dealers and financial institutions with:
- FINRA and SEC examination readiness
- AML program enhancements
- Supervisory framework reviews
- Private placement and capital markets compliance support
Disclaimer
This post is for informational purposes only and does not constitute legal advice. Firms should consult qualified legal and compliance professionals regarding their specific regulatory obligations.
