FINRA Revises Broker-Dealer Compensation Rules

On July 24, 2026, the Securities and Exchange Commission approved the Financial Industry Regulatory Authority’s (“FINRA”) proposed amendments to FINRA Rule 5110 (Corporate Financing Rule—Underwriting Terms and Arrangements) and FINRA Rule 5123 (Private Placements of Securities).¹ Below is a practical overview of what changed and why it matters for capital markets participants.

Background: What FINRA Rules 5110 and 5123 Do

FINRA Rule 5110 plays a central role in the capital raising process by prohibiting unfair or unreasonable underwriting terms in public offerings. In general, the rule requires any FINRA member that participates in a public offering to file documents and information with FINRA about the underwriting terms and arrangements, and FINRA’s Corporate Financing Department reviews that information before the offering begins. A member may proceed only if FINRA issues an opinion that it has no objection to the proposed terms. Among other things, the rule governs how underwriting compensation is valued and identifies payments that are not deemed underwriting compensation.

FINRA Rule 5123, by contrast, addresses the private placement market. It generally requires members to file with FINRA any private placement memorandum, term sheet, or other offering document—and any retail communication that promotes or recommends a private placement—within 15 calendar days of the date of first sale, unless an exemption applies. FINRA views Rule 5123 as critical to identifying potential trends and rule violations in the private placement market, an important source of capital for small and midsize businesses.

FINRA Rule 5110 Amendments

1. A New, Closing-Price-Based Valuation Method

Perhaps the most significant change is a simplification of how members value securities they acquire as underwriting compensation. Under the current rule, that value must be based on either the public offering price per security or the market price on the acquisition date if a “bona fide public market” exists for the security. The “bona fide public market” definition requires that the security trade on a national securities exchange and relies on Regulation M’s concepts of average daily trading volume and public float.

FINRA found that this approach could be complex and unworkable. When a security lacks both a public offering price and a “bona fide public market,” it cannot be valued under the rule and is treated as prohibited indeterminate compensation, forcing members either to negotiate a different form of compensation or to request an exemption from FINRA—a time-consuming and expensive process. The amendments replace the “bona fide public market” method in Rule 5110(c)(2) and (3) with a method based on the closing market price of the security on a U.S. registered national securities exchange or a “designated offshore securities market” (as defined under Rule 902(b) under the Securities Act of 1933, as amended (the Securities Act)) on the date of acquisition. Because the new method relies on readily available market data rather than trading-volume and float calculations, it should offer members greater predictability and certainty while continuing to ensure securities are valued fairly.

2. Codified Exclusions from Underwriting Compensation

The amendments codify three categories of securities acquisitions as excluded from underwriting compensation under FINRA Rule 5110—each based on exemptive relief FINRA has consistently granted in the past:

• Debt-for-equity exchanges. In these transactions, a lender makes a cash loan to the issuer and receives equity securities of the issuer—often called exchange shares—in return. Where that lender is an affiliate of a FINRA member underwriting the offering in which the shares are resold, FINRA treats the lender as an “affiliated lender” (i.e., a lender that falls within the definition of "participating member" under Rule 5110 by virtue of its affiliation with the underwriting broker-dealer). FINRA refers to the lender's affiliated broker-dealer—not the lender itself—as the "affiliated member," and the shares fall within underwriting compensation. New FINRA Rule 5110.01(b)(23) excludes equity securities that the affiliated lender acquires in connection with debt-for-equity exchange transactions, provided that the exchange is structured to benefit the issuer (not the lender that made the loan or its affiliated broker-dealer member ); the affiliated member subsequently offers all of the acquired equity in a firm commitment offering; the terms are set through arm’s-length negotiations based on the market price of the equity; and the affiliated member negotiates customary compensation for the subsequent offering.
• Capital investments in DPPs and unlisted REITs. New FINRA Rule 5110.01(b)(24) excludes securities a participating member acquires before or during an offering in connection with direct participation programs (“DPPs”) and unlisted real estate investment trusts (“REITs”), subject to conditions: the acquisition is disclosed in the prospectus; both the publicly offered securities and the acquired securities are valued and priced on a net asset value (“NAV”) basis; the offering is subject to FINRA Rule 2310, which regulates the underwriting terms and arrangements of publicly offered DPPs and unlisted REITs and caps organization and offering expenses at 15% of gross proceeds, including a 10% cap on all forms of compensation payable to underwriters, broker-dealers and their affiliates; and the acquired securities are restricted for 180 days following the commencement of sales.
• Non-convertible preferred securities. These are added to the existing exclusion framework (discussed further below).

By codifying the factors FINRA has historically applied, these exclusions eliminate the need for the exemptive-request process when the conditions are met—reducing compliance time and expense—while still permitting members to seek exemptive relief under FINRA Rule 5110(i) and the FINRA Rule 9600 Series for transactions that fall outside the stated conditions.

3. Parallel Treatment of Non-Convertible Preferred Securities

Previously, non-convertible (or non-exchangeable) debt securities and derivative instruments acquired by a participating member at a fair price were considered underwriting compensation but carried no compensation value under former FINRA Rule 5110. Prior to the amendments, the rule did not extend that parallel treatment to non-convertible preferred securities. In its rule proposal, FINRA noted that both non-convertible debt and non-convertible preferred securities cannot be converted into common stock and provide fixed, predetermined payments to holders. Consistent with this view, the amendments now treat non-convertible preferred securities the same way—no compensation value—so long as they are acquired at a fair price. Importantly, if such securities are not acquired at a fair price, the underwriting compensation attributed to them is the difference between their fair price and their actual price, and FINRA retains its ability to review these transactions.

4. Extension of Termination-Fee Requirements to “Tail Fees”

Prior to the amendments, FINRA Rule 5110 permitted termination fees and rights of first refusal in connection with a terminated public offering when specific issuer-protective requirements were met. In its amending rule proposal, FINRA observed that members increasingly negotiate payments described as “tail fees” in engagement letters—payments due if a subsequent financing occurs with investors the member introduced after an agreement terminates. FINRA therefore now views these fees as comparable to termination fees. Based on this perspective, the amendments revise Rule 5110(g)(5)(B) to apply the same requirements to tail fees. Those conditions include eliminating any obligation to pay a tail fee if the issuer terminates for cause; requiring that the amount be reasonable in relation to the underwriting services contemplated; and providing that the issuer is not responsible for the fee unless the transaction is consummated within two years of the issuer’s termination of the engagement. Tail fees that do not meet these requirements would constitute unreasonable arrangements under the rule.

FINRA Rule 5123 Amendments: Expanded Filing Exemptions

On the private placement side, the amendments expand FINRA Rule 5123’s filing exemption categories for sales to accredited investors. Specifically, amended Rule 5123(b)(1) adds two categories of investors that the SEC added to the definition of “accredited investor” under Rule 501 under the Securities Act in August 2020:

• Any entity (of a type not already listed) not formed for the specific purpose of acquiring the securities offered and owning investments in excess of $5,000,000; and
• Any family office with assets under management in excess of $5,000,000 that was not formed to acquire the offered securities and whose investment is directed by a person capable of evaluating the merits and risks of the investment.

FINRA reasoned that these investors possess a level of sophistication similar to the institutional accredited investors already exempt under Rule 5123 and generally do not need the additional protections that the filing requirements provide. The change establishes consistency between FINRA’s rules and the SEC’s amended accredited investor definition without materially affecting investor protection.

Takeaways for Practitioners

Taken together, these amendments should reduce friction in both the public offering and private placement processes. Underwriters and issuers gain a more predictable valuation methodology, clearer treatment of common financing structures such as debt-for-equity exchanges and DPP/REIT capital investments, parity between non-convertible preferred and debt securities, and express guidance that tail fees must meet the same guardrails as termination fees. Placement agents, meanwhile, benefit from a broader Rule 5123 filing exemption aligned with the current accredited investor definition. The full text of the amendments and additional background are available in FINRA’s rule filing (SR-FINRA-2026-002), and the SEC’s approving order (Release No. 34-105987) provides its complete analysis. 

Footnote

1. See SEC Release No. 34-105987, Order Approving a Proposed Rule Change to Amend FINRA Rules 5110 and 5123 (July 24, 2026)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.