FINRA Compliance

FINRA and the Marketplace

In recent years the Financial Industry Regulatory Authority (“FINRA”) has evolved from a rather unobtrusive SRO (Self-Regulatory Organization) into a dominant and pervasive securities market gatekeeper with sweeping authority. FINRA currently monitors and regulates the trading of more than 5,000 securities and employs a staff in excess of 3,400 individuals. FINRA is responsible for processing 15c2-11 applications by market makers which result in the issuance of a trading symbol to, and the quotation of, the securities of issuers.  Moreover, issuers with securities that publicly trade on the OTC markets must give FINRA advance notice on corporate actions ranging from reverse splits, name changes, changes of domicile, changing trading symbols and changes in capital structure. FINRA processes these corporate actions and relays the new information to the capital marketplace.  If FINRA does not process a corporate action, it does not relay to the capital marketplace.  Due to the ever-increasing complexity of FINRA compliance, representation by experienced securities counsel is essential for public issuers. In many cases, FINRA requires attorney opinion letters in conjunction with the processing of corporate actions. 

History

FINRA is a self-regulatory organization (“SRO”).  Originally founded in 1939 as the National Association of Securities Dealers (NASD), FINRA’s was designed to regulate and license member brokerage firms, broker-dealers, their sales staffs and the exchange markets. As the scope of their powers grew, it became apparent that this modest SRO was slated to become a significant securities regulator.  On July 26, 2007, the NASD officially became FINRA.     

FINRA as a Gatekeeper

Not long ago, the responsibility of enforcing securities regulations fell solely on the shoulders of the Securities & Exchange Commission (SEC). In today’s environment, FINRA has become an equally dominant gatekeeper in establishing and maintaining market transparency while simultaneously processing procedural matters.  FINRA has established the Office of Fraud Detection and Market Intelligence, which monitors the trading activity and press releases of issuers in the marketplace and conducts related investigations. FINRA performs many important functions including being tasked with the responsibility of maintaining an orderly marketplace. FINRA works with the SEC as a front line in the detection and prosecution of issuers when regulatory infractions occur. Although FINRA in and of itself does not possess the legal authority to prosecute issuers, it actively engages in investigations related to market fraud and shares its findings with prosecutorial authorities (i.e., the SEC for civil actions and either Department of Justice of State Attorney for criminal violations).  FINRA maintains a vital role in the enforcement of securities laws by providing prosecutorial bodies with crucial data that substantiates when a violation has occurred.    

Corporate Actions and Symbol Changes

Effective September 27, 2010, the SEC approved FINRA Rule 6490 (Processing of Company Related Actions).  Rule 6490 requires that corporations whose securities are trading on the over-the-counter market (OTCQX, OTCQB, OTCBB or pinksheets) notify FINRA in a timely manner of certain corporate actions, such as dividends, forward or reverse splits, rights or subscription offerings, and name changes.  The Rule grants FINRA discretionary power when processing documents related to the announcements. FINRA requires that the Company complete the Issuer Company-Related Action Notification Form and submit it to FINRA no later than 10 calendar days prior to the record date of the corporate action. In addition to the Form itself, FINRA requires the submittal of numerous supporting documents and historical corporate information.  The historical corporate information must be on either the issuer’s letterhead or that of such issuer’s attorney.  Symbol changes associated with name changes are not automatic and must be specifically requested.  FINRA charges issuers fees for the processing of corporate actions. Late filings (i.e., less than 10 days prior to the effectiveness of the corporate action) are subject to late filing fee penalties, which can be substantial. 

Chart of FINRA Filing Fees

SEA Rule 10b-17Action       
  Timely SEA Rule 10b-17 Notification   $200
  Late SEA Rule 10b-17 Notification  Submitted at least 5 calendar days prior to Corporate Action Date   $1,000
  Late SEA Rule 10b-17 Notification  Submitted at least 1 calendar day prior to Corporate Action Date   $2,000
  Late SEA Rule 10b-17 Notification Submitted on or after Corporate Action Date   $5,000
  Other Company-Related Action   Fee
  Voluntary Symbol Request Change   $500
  Initial Symbol Setup   No Charge
  Symbol Deletion   No Charge
  Appeals   Fee
  Action Determination Appeal Fee   $4,000 

 

Processing 15c-211’s

< span style=”color: #000000;”>A Form 211 must submitted to the FINRA OTC Compliance Unit by a market maker to initiate or resume quotations in the OTC Markets or any other inter-dealer quotation medium pursuant to SEC Rule 15c2-11.  Notably, it is the market maker that seeks to quote the securities of the issuer that must submit the Form 211 to FINRA and respond to comments.  The essence of the Form 211 is to ensure that the market maker has completed satisfactory due diligence on the issuer to post quotations and make a market in the issuers securities.  There is no standard time to process a 211 and clear the market maker to begin quoting a security on the OTC market. The time it takes to review a 211 may vary significantly depending on many factors, including whether or not FINRA has to request additional information from the market maker that submitted the form and how long it takes the market maker to respond to requests for additional information. The Form 211 review process is considered proprietary and thus, FINRA will only discuss details of the filing or review directly with the firm that submitted the Form 211. In addition to obtaining a copy of a current registration statement (if any) and the issuer’s most recent annual report on Form 10-K and quarterly reports on Form 10-Q, a summary of the information requirements in a Form 211 includes:

  • The exact name of the issuer and its predecessor (if any);
  • The address of its principal executive offices;
  • The state of incorporation, if it is a corporation;
  • The exact title and class of the security;
  • The par or stated value of the security;
  • The number of shares or total amount of the securities outstanding as of the end of the issuer’s most recent fiscal year;
  • The name and address of the transfer agent;
  • The nature of the issuer’s business;
  • The nature of products or services offered;
  • The nature and extent of the issuer’s facilities;
  • The name of the chief executive officer and members of the board of directors;
  • The issuer’s most recent balance sheet and profit and loss and retained earnings statements;
  • Similar financial information for such part of the 2 preceding fiscal years as the issuer or its predecessor has been in existence;
  • Whether the broker or dealer or any associated person is affiliated, directly or indirectly with the issuer;
  • Whether the quotation is being published or submitted on behalf of any other broker or dealer and, if so, the name of such broker or dealer; and
  • Whether the quotation is being submitted or published directly or indirectly on behalf of the issuer, or any director, officer or any person, directly or indirectly the beneficial owner of more than 10 percent of the outstanding units or shares of any equity security of the issuer and, if so, the name of such person, and the basis for any exemption under the federal securities laws for any sales of such securities on behalf of such person.

FINRA and DTC

The Depository Trust Company (“DTC”) is a central securities depository in the U.S. which was originally created as a central holding and clearing system to handle the flow of trading securities and the problems with moving physical certificates among trading parties.  DTC is regulated by the SEC, the Federal Reserve System and the New York State Department of Financial Services.  Today, and as noted by the SEC, “…DTC provides clearance, settlement, custodial, underwriting, registration, dividend, and proxy services for a substantial portion of all equities, corporate and municipal debt, exchange traded funds, and money market instruments available for trading in the United States.  In 2010, DTC processed 295,000,000 book entry transfers of securities worth $273.8 trillion.” Like a Form 211 submittal to FINRA, an issuer cannot make direct application to DTC for eligibility.  An application must be submitted and sponsored by a DTC Participant.  A current list of DTC Participants can be found on the DTC website.  So to start, an issuer needs to establish a relationship with one of these participants.  A Participant can submit an application for a new offering or for a security that has already been issued and is already trading on the OTC market.  FINRA and DTC are two separate entities with separate functions; however, they share communication with each other and often work together.  Each time an issuer submits a notice to FINRA of a corporate action, FINRA shares such information with DTC prompting DTC to review the issuer for continued DTC eligibility.  DTC will notify the issuer of the review and request certain updated information, such as a new legal opinion confirming the issuer’s continued eligibility. 

FINRA and Trading Suspensions

Pursuant to FINRA Rule 6440, in circumstances in which it is necessary to protect investors and the public interest, FINRA may direct members to halt trading and quotations in OTC Equity Securities if: (i) such security is an ADR and its principal foreign market has halted trading for regulatory reasons because of public interest concerns other than solely for material news, a regulatory filing deficiency, or operational reasons; (ii) such security is a listed security and the national securities exchange, or foreign securities exchange or market imposes a trading halt in the listed security; or (iii) FINRA determines that an extraordinary event has occurred or is ongoing that has had a material effect on the market for the security or has caused or has the potential to cause major disruption to the marketplace and/or significant uncertainty in the settlement and clearance process. Additionally, trading and quotation in OTC Equity Securities may be halted if ordered by the SEC or pursuant to any other lawful government order.

FINRA Attorneys

As with all regulatory processes, the assistance of an experienced attorney is vital.  In the case of a FINRA request for the processing of a corporate action, the assistance of qualified counsel can make the difference of a delay that can stretch for months, or even the refusal by FINRA to process the action at all.  Although a Form 211 is submitted by a market maker, such market maker works closely with securities counsel in completing the application and putting together all the required supporting documentation.  Moreover, FINRA generally requires a legal opinion regarding tradability as part of the application process.