SERIES 7 | SERIES 65 | FINANCIAL REGULATION COURSES
FINRA Rule 5110 — Corporate Financing Rule — Underwriting Terms and Arrangements — is the comprehensive rule governing the compensation that member firms may receive in connection with the public offering of securities, prohibiting underwriting compensation that is unfair or unreasonable as determined by FINRA, requiring the filing of offering documents and compensation information with FINRA before participating in any covered public offering, establishing lock-up restrictions on the resale of securities received as underwriting compensation, and imposing disclosure obligations designed to ensure that issuers and investors in public offerings are protected from excessive or abusive underwriting compensation arrangements that could harm their interests.
The primary function of Rule 5110 — as stated explicitly in FINRA's own regulatory notices — is to protect issuers and their investors at the time of the offering from unfair underwriting terms and arrangements. The rule recognises that issuers seeking to raise capital through public offerings may be in an inherently unequal bargaining position relative to the underwriters they need to bring their offering to market — and that absent regulatory oversight of the fairness of underwriting compensation the competitive pressure for underwriting business could give way to arrangements that extract excessive value from issuers and investors for the benefit of the underwriting firms.
Rule 5110 has been substantially amended and modernised over its history — most recently through comprehensive amendments effective September 16, 2020 that reorganised and simplified the rule's structure while maintaining its core investor and issuer protection objectives. Active proposed amendments were filed with the SEC in December 2024 and January 2026 — indicating that the rule continues to evolve in response to market developments and capital formation considerations. The rule is tested on the Series 7 examination in the context of the underwriting process, compensation fairness, and the regulatory framework governing public securities offerings.
The Fairness Standard — What Rule 5110 Prohibits
The foundational prohibition of Rule 5110 is clear and comprehensive — no member firm may participate in a public offering of securities if the underwriting terms and conditions, including compensation to the underwriting syndicate, are unfair or unreasonable as defined by the rule.
The fairness standard addresses the entire package of compensation and benefits that member firms receive in connection with a public offering — not merely the stated underwriting discount or commission but every form of direct and indirect economic benefit flowing to the underwriters from the transaction. This comprehensive approach reflects FINRA's recognition that unfair underwriting arrangements can be structured in ways that obscure the true total compensation being received — through warrants, options, rights of first refusal on future transactions, board seats, consulting fees, and other arrangements that supplement the disclosed cash compensation.
What constitutes fair and reasonable underwriting compensation depends on the specific characteristics of each offering — the size of the offering, the type of securities being offered, the risk profile of the issuer, the market conditions at the time of the offering, and the competitive landscape of the underwriting market for similar transactions. FINRA evaluates compensation fairness in the context of these specific factors rather than applying a rigid percentage cap — though historical FINRA precedent and industry practice provide meaningful reference points for assessing whether specific compensation packages fall within the range of fairness for transactions with similar characteristics.
Filing Requirements — The Regulatory Review Process
Rule 5110(h) establishes the filing requirements applicable to member firms that participate in covered public offerings — requiring the submission to FINRA of offering documents and compensation information that enables FINRA to assess the fairness of the underwriting terms before the offering is consummated.
The filing must be made no later than one business day after the filing of the registration statement with the SEC — or, if the securities are not registered under the Securities Act of 1933, no later than the first date on which the securities are offered to the public. This early filing requirement ensures that FINRA has adequate time to review the underwriting arrangements before the offering closes and investors are committed to purchasing the securities at potentially unfair terms.
The filing must include the registration statement or other offering documents, a FINRA-approved version of the underwriting agreement or a description of the underwriting arrangement, and detailed information about the compensation — including an estimate of the maximum value of each item of underwriting compensation. The compensation disclosure must be comprehensive — identifying every form of direct and indirect compensation including cash fees, securities received as compensation, rights to receive securities in the future, advisory fees, consulting arrangements, board representation rights, and any other economic benefit flowing to the underwriting firm from the offering transaction.
The filing must include a representation as to whether any officer or director of the issuer or any beneficial owner of ten percent or more of any class of the issuer's equity or equity-linked securities is an associated person or affiliate of a participating member — alerting FINRA to potential conflicts of interest that could affect the objectivity of the underwriting arrangement and the fairness of compensation determinations.
Underwriting Compensation — What Is Included
Rule 5110 defines underwriting compensation broadly — encompassing any form of value received by any participating member or its associated persons in connection with a public offering, regardless of the form in which it is received.
Cash compensation includes the underwriting discount — the difference between the public offering price and the price at which the underwriter purchases securities from the issuer — as well as advisory fees, due diligence fees, consulting fees, structuring fees, and any other cash payments made to the underwriting firm in connection with the offering.
Non-cash compensation includes securities of the issuer received by the underwriter — including warrants to purchase shares at a specified exercise price, overallotment options allowing the underwriter to purchase additional shares at the offering price, shares received as partial compensation for underwriting services, and any other equity or equity-linked securities of the issuer that flow to the underwriting firm in connection with the offering.
The inclusion of non-cash compensation in the underwriting compensation calculation prevents issuers and investors from being misled by an apparently modest cash commission that is supplemented by valuable equity securities — an approach that effectively extracts additional value from the issuer that is not reflected in the disclosed cash compensation.
Lock-Up Restrictions — Preventing Immediate Resale
Rule 5110 imposes lock-up restrictions on securities received by underwriters as compensation — requiring that such securities be held for a specified period rather than immediately resold upon completion of the offering.
The standard lock-up period under Rule 5110 is 180 days following the effective date of the offering — preventing underwriters from immediately liquidating compensation securities into the public market in a manner that could depress the offering price and harm investors who purchased in the offering at a higher price. The 180-day lock-up gives the secondary market adequate time to establish a genuine price discovery process for the newly public securities before underwriter compensation holdings can be sold.
Lock-up agreements are a standard feature of the IPO market — companies going public through an initial public offering typically require not only underwriters but also executives, directors, and significant pre-IPO shareholders to agree to 180-day lock-ups as a condition of the offering. The Rule 5110 lock-up requirement for underwriter compensation securities operates alongside these contractual lock-ups as a regulatory floor that applies regardless of what the underwriting agreement specifies.
Exemptions From the Filing Requirements
Rule 5110 provides several exemptions from the filing requirements — recognising that certain types of offerings present lower risk of unfair underwriting arrangements that warrant the full regulatory review process.
Offerings of non-convertible or non-exchangeable debt securities and non-convertible or non-exchangeable preferred securities that are investment grade rated at the time of filing — or that are shelf-registered offerings by Well-Known Seasoned Issuers — are exempt from the filing requirement on the basis that investment grade issuers and WKSIs are sufficiently sophisticated and well-resourced to protect their own interests in negotiating underwriting terms without FINRA review. The proposed December 2024 amendments address this area — proposing to modify the conditions of the investment grade and WKSI exemptions.
Offerings of certain standardised financial products — including certain exchange-traded products and specified derivative securities — may also be exempt where the standardised nature of the product and its established market pricing make FINRA review of underwriting fairness unnecessary.
Current Regulatory Developments
FINRA issued Regulatory Notice 25-06 in early 2025 — soliciting comment on proposed amendments to Rule 5110 that would make substantive, organisational, and terminology changes to the rule in response to feedback received from Regulatory Notice 23-09 seeking input on rules impacting capital formation. The proposed amendments aim to reduce regulatory burden on market participants while maintaining important protections for issuers and investors, to codify as exclusions certain exemptions that previously required case-by-case FINRA staff approval, and to enhance transparency and efficiency in the regulatory process.
A proposed rule change filed with the SEC on January 30, 2026 proposed additional exclusions from the underwriting compensation calculation for non-convertible preferred securities acquired at a fair price — treating them consistently with the existing exclusion for non-convertible debt securities on the basis that both instruments provide fixed income streams without equity conversion features that could create compensation windfall gains.
Connection to the Underwriter and Initial Public Offering Framework
Rule 5110 operates within the broader framework of securities offering regulation — connecting directly to the Securities Act of 1933's registration requirements, the SEC's rules governing prospectus disclosure, and the regulatory framework for initial public offerings and secondary offerings that is tested throughout the Series 7 examination curriculum.
The Underwriter entry of this dictionary addresses the role of underwriters in the public offering process — the functions, responsibilities, and regulatory obligations of the investment banks and broker-dealers who bring securities offerings to market. The Initial Public Offering entry addresses the complete process of taking a company public — from the decision to go public through the SEC registration process to the pricing and allocation of shares. Rule 5110 is the FINRA-level regulation that governs the compensation dimension of the underwriting relationship — ensuring that the economic terms of the underwriting arrangement are fair to the issuer and its investors.
Examination Relevance and Key Takeaways
FINRA Rule 5110 is tested on the Series 7 examination in the context of the public offering process, underwriting compensation, filing requirements, and the regulatory framework protecting issuers and investors from unfair underwriting arrangements.
The key points to retain are these.
FINRA Rule 5110 — Corporate Financing Rule — Underwriting Terms and Arrangements — prohibits member firms from participating in a public offering if the underwriting terms and compensation are unfair or unreasonable as determined by FINRA. The primary function is to protect issuers and their investors from excessive underwriting compensation. Member firms must file offering documents and compensation information with FINRA no later than one business day after the filing of the registration statement with the SEC — or the first date of public offering for unregistered securities.
Underwriting compensation is defined broadly to include all cash and non-cash compensation — including warrants, overallotment options, advisory fees, consulting fees, and any other economic benefit received in connection with the offering. Securities received as underwriting compensation are subject to a 180-day lock-up restriction following the offering effective date — preventing immediate resale that could harm investors. Exemptions from filing requirements are available for investment grade rated non-convertible debt and preferred securities offerings and for qualifying shelf-registered WKSI offerings. FINRA issued Regulatory Notice 25-06 in 2025 proposing amendments to modernise the rule and reduce regulatory burden while maintaining investor protection — and filed additional proposed rule changes with the SEC in January 2026 addressing non-convertible preferred security compensation treatment.
