FINRA Proposes New Rules and Fees for Actions Taken by OTCBB and PinkSheet Issuers

Financial Industry Regulatory Authority, Inc. (“FINRA”) currently operates the OTC Bulletin Board (“OTCBB”) and the OTC Reporting Facility (“ORF”), which together provides a trading facility and mechanism for FINRA members to trade and report, for both regulatory and dissemination purposes, transactions in OTC equity securities. 

Although FINRA does in theory process and review issuers’ Company Related Actions in the OTC market, its role is limited. FINRA does not have any true oversight function of OTC market issuers.  It only has jurisdiction over FINRA members.  As a result, FINRA and the United States Securities and Exchange Commission (“SEC”) have both expressed concerns that certain parties may be attempting to use the facilities of FINRA, including its ministerial functions, to announce corporate-related actions to further fraudulent activities in the OTC market. 

On December 17, 2009, FINRA proposed to the SEC that it be allowed to adopt Rule 6490 - Processing of Company-Related Actions (“Rule 6490”), to clarify its regulatory authority and discretionary power when processing documents related to announcements for company-related actions by issuers whose securities trade in the OTC markets (“OTC Issuers”). Rule 6490 would codify the authority of FINRA's Department of Operations to conduct in-depth reviews of company-related actions and allow the staff discretion not to process such actions that are incomplete or when certain indicators of potential fraud exist.  FINRA would also be granted authority to charge a fee for these services.

“Company Related Actions” are defined in Rule 6490 as the issuance of dividends or other distributions in cash or kind, stock splits or reverse stock splits, or rights or other subscriptions offerings, the issuance or change to a trading symbol or company name, mergers, acquisition, dissolutions or other company control transactions, and any bankruptcy or liquidations by an OTC Issuer.

Rule 6490 would set out procedures for the submission, review, and determination of Company-Related Actions.  Rule 6490 would permit FINRA to prescribe the forms, supporting documentation and procedures necessary to conduct more in-depth reviews of OTC Issuer Company-Related Actions.

Rule 6490 would grant FINRA the discretionary authority to not process the documentation submitted in connection with a Company Related Action in order  to protect investors, the public interest and to maintain fair and orderly markets.  Specifically, FINRA would have the right to exercise this discretionary authority in the following circumstances:

1.    Incomplete documentation;

2.    OTC Issuer not current in reporting obligations;

3.    Parties related to the OTC Issuer are subject to investigation or action by a regulatory body;

4.   Government authority has provided information to FINRA indicating person involved are potentially involved in fraudulent activities; and

5.   Significant uncertainty regarding the OTC Issuer’s securities.

The OTC Issuer or the requesting party may appeal the decision of FINRA to not process the documentation.  This right of appeal must be exercised in writing within seven (7) days of receiving written notice from FINRA of its decision.

Rule 6490 will give FINRA the right to request further information from OTC Issuers and from third parties such as Depositary Transfer Corporation or the OTC Issuer’s transfer agent.

FINRA is proposing to charge the following non-refundable fees for the review and processing of documentation related to OTC Issuer’s Company-Related Actions:

1.    Timely Notification: $200;

2.    Late Notification, 5 days prior to action: $1,000;

3.    Late Notification, 1 day prior to action: $2,000;

4.    Notification After Effective Date: $5,000;

5.    Voluntary Symbol Request Change: $500; and

6.    Appeal Fee: $4,000.

The SEC has closed its Request for Comments concerning Rule 6490.  Only two comment letters were received as the request for comments went out at Christmas and the notice was set out was difficult for OTC Issuers and others to even discover on the SEC website.

The biggest issue with Rule 6490 is that it does not create privity between OTC Issuers and FINRA.  FINRA still has no real clout over OTC Issuers.  In theory Rule 6490 is a good idea to level the playing field and legitimize OTC Issuers.  Let’s see if the SEC and FINRA will be able to fine tune the rule a bit further to make it effective prior to adoption.