The Financial Industry Regulatory Authority provided an update to member firms following its review of Special Purpose Acquisition Companies (SPACs) and their affiliates.
SPACs are publicly-traded corporations formed to search for a private company to merge with and raise money from investors through an initial public offering, giving the targeted company a shorter process for being listed than a traditional IPO.
In October 2021, FINRA launched a targeted exam to review firms’ offering of, and services provided to, SPACs. The review focused on firms that participated in SPAC offerings and included areas such as reasonable investigation, best interest, disclosure of outside activities or potential conflicts, net capital and supervision.
In its update released recently, FINRA reminded members that they are required to conduct reasonable investigations of the issuers and the securities they recommend, including SPACs. The authority posed questions for firms to consider when recommending a SPAC and when evaluating whether their supervisory systems are reasonably designed to address the risks of their SPAC-related activities.
Among the questions were:
-Does your firm perform an independent review of due diligence materials prepared by or received from third parties?
-How does your firm document its independent review, assessment of and follow-up on potential red flags, and final conclusions?
-Does your firm participate in due diligence meetings, calls or presentations conducted by the third party or other participating members?
-How does your firm document its participation and the information it has received and reviewed?
FINRA also presented questions to help firms assess their compliance with FINRA Rules 5110 (Corporate Financing Rule – Underwriting Terms and Arrangements), 5121 (Public Offerings of Securities with Conflicts of Interest), 2262 (Disclosure of Control Relationship with Issuer), and 4110 (Capital Compliance), among others.
Other questions were aimed at helping firms assess how they identify, address and disclose potential or actual conflicts of interest when underwriting or recommending transactions in SPACs.
Member firms that recommend SPACs to retail customers were also reminded that they must comply with the SEC’s Regulation Best Interest (Reg BI).
FINRA concluded by saying, “This update notes key requirements for members that participate in SPAC offerings. The information presented in this update is intended to remind member firms of the relevant rules and provide them with ideas and questions that they can use to enhance their supervisory programs.”
The attorneys at Lewitas Hyman fully understand the regulatory scrutiny financial professionals and their firms face from the various regulators that oversee the financial services industry. We have decades of experience representing clients with respect to examinations, investigations and enforcement proceedings initiated by the SEC, FINRA, state securities regulatory agencies and other self-regulatory organizations. If your firm is facing an investigation from a regulatory agency, please contact Lewitas Hyman at (888) 655-6002 or through our online contact form.