Series 24: The Corporate Financing Rule (FINRA Rule 5110)

The Corporate Financing Rule (FINRA Rule 5110)

The Corporate Financing Rule encompasses many specific rules about how an investment bank may charge its clients.

The first rule is 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, they will give an opinion of “no objection.” Note that FINRA will not judge the merit of the securities, and for this reason the underwriters cannot say that FINRA “approved” of the securities.

As we said earlier, spreads often average around 7% of the total proceeds, but they can vary depending on several factors. In determining whether a spread is fair and reasonable, FINRA will rely on the following factors.

• • The size of the offering. Larger offerings tend to have lower percentage spreads than smaller offerings.
• • The riskiness of the offering. Offerings where the underwriters are pretty confident that they will sell the securities have lower percentage spreads than riskier offerings.
• • Type of offering. Firm commitments have greater percentage spreads than best