Update 8/16/10: I completed a corporate action last week. While FINRA asked me for a very large amount of supporting documentation, for the pending transaction as well as historical transactions leading up to the pending transaction, they eventually cleared my action in the timeframe requested. DTC also reviewed the transaction in great detail and eventually agreed not to touch the issuers eligibility. These situations will be scrutinized on a case-by-case basis, and good supporting documentation is key.
In December 2009, FINRA asked the SEC for discretionary power in approving (or disapproving) certain corporate actions for OTC securities. Their request was granted, and the result is new FINRA Rule 6490. The SEC Release can be read here. The types of corporate actions covered include name changes, stock splits, and symbol changes covered by Rule 10b-17.
The new rule outlines five factors that FINRA can consider in determining whether a request to process documentation is deficient: (1) FINRA staff reasonably believes the forms and all supporting documentation, in whole or in part, may not be complete, accurate or with proper authority; (2) the issuer is not current in its reporting obligations, if applicable, to the Commission or other regulatory authority; (3) FINRA has actual knowledge that parties related to the Company-Related Action are the subject of pending, adjudicated or settled regulatory action or investigation by a regulatory body, or civil or criminal action related to fraud or securities laws violations; (4) a government authority or regulator has provided information to FINRA, or FINRA has actual knowledge, indicating that persons related to the Company-Related Action may be potentially involved in fraudulent activities related to the securities market and/or pose a threat to public investors; and/or (5) there is significant uncertainty in the settlement and clearance process for the security.
The new rule also creates a fee schedule, ranging from $200 for a timely request for one of these corporate actions, to $4,000 to appeal a denial by FINRA.
We have not tested this new rule yet, so we are interested to see how far FINRA intends to take its new discretionary authority. In the back of my mind, I have a more theoretical legal question looming, and that is this: if an issuer is not a reporting issuer under the ’34 Act, and is not subject to any specific trading-exchange requirements regarding its corporate actions, and the corporate action is approved by all necessary state corporate law actions, what authority does FINRA have over the issuer? Can FINRA block a corporate action that was validly taken in accordance with state law, such as a name change and stock split? Given that broker-dealers decide if and when an issuer’s stock is traded over-the-counter (to the extent that some issuers may not even be aware that their stock trades over-the-counter), if the action was valid, and completed, and FINRA doesn’t recognize it, what value are they adding to their constituency ,the broker-dealer community?
