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Updated FINRA Regulations on Corporate Action Notification Process

Commencing on June 3, 2023, the Financial Industry Regulatory Authority (FINRA) will introduce changes to the procedure for submitting a Company-Related Action Notification form. This form initiates the process for implementing a company-driven corporate action for firms trading on OTC Markets. This revised process will enable businesses to submit forms, receive updates, and reply to feedback via a digital FINRA portal.

A Closer Look at Rule 6490

Effective from September 27, 2010, the Securities and Exchange Commission (SEC) endorsed FINRA Rule 6490 (Processing of Company-Related Actions). According to Rule 6490, companies whose securities are traded on the OTC Markets should inform FINRA promptly about certain corporate actions, like dividends, forward or reverse splits, rights or subscription offerings, symbol changes, and name changes. The rule gives FINRA discretionary authority during the review of documents connected to these announcements.

Rule 6490 cooperates with Exchange Act Rule 10b-17, which declares any failure to provide notification concerning certain actions regarding publicly traded securities as a deceptive or manipulative device, as stipulated in section 10(b) of the Act. The types of actions include dividends or other distributions in cash or in kind, stock splits or reverse splits, and rights or other subscription offerings. Section (b) necessitates that the notification be sent to FINRA no later than ten days before the record date involved.

When FINRA finalizes the processing of a corporate action, it notifies OTC Markets about the changes. Subsequently, these changes are reflected on the company's quotation page on OTC Markets and all other quotation platforms (such as Yahoo Finance and Bloomberg). These changes most frequently involve the repricing of securities after a forward or reverse split, the issuance of a new trading symbol following a name change or merger, and the appearance of the new name on the company's quotation page.

Before 2010, FINRA’s role was largely clerical due to its limited jurisdiction to impose informational or other regulatory requirements and its fundamental lack of authority to reject proposed changes. However, Rule 6490 enhanced FINRA's powers, which it has since utilized.

Rule 6490(d)(3) lays out the conditions under which an SEA Rule 10b-17 Action or Other Company-Related Action may be considered deficient and hence may not be processed. The rule outlines several factors that FINRA could use to make such deficiency determinations.

Over time, I have occasionally discussed the FINRA corporate action review process, often highlighting concerns about possible regulatory overstepping. However, the fact is that there haven't been any regulatory or rule amendments to the process for many years, and so, there hasn't been much to comment on until now.

Though this may seem like a complaint, it is worth noting that the FINRA corporate action review process has become more stringent than ever before. Even simple corporate actions now take 3-4 months to process, with more complex cases often taking over a year. The extent of review and scrutiny has increased substantially. Companies should anticipate FINRA examining all current and historical corporate records and actions, outstanding debts/liabilities, shareholder records, and business descriptions and plans. Therefore, firms trading on OTC Markets and considering a corporate action should take into account this significant time factor and ensure that all records are properly organized well in advance.

Introducing the FINRA Gateway

FINRA has broadened the scope of its "FINRA Gateway" to include the processing of Company-Related Corporate Actions. The Gateway is already utilized by broker-dealers to process Rule 5110 Underwriter Compensation approval requests. The newly expanded gateway, referred to as the "Corporate Actions Management Platform," offers several features, enabling users to:

• • Submit and modify company-related action submissions • Execute electronic payments via FINRA's OPAY system for imposed notification fees • Monitor the status of submissions • Communicate directly with FINRA through each submission • Receive alerts when FINRA initiates a new information request • Reply to information requests

Current users (for instance, our firm already has gateway access on behalf of broker-dealer clients) can use their existing access codes. FINRA will be providing a comprehensive user guide on its website in the upcoming weeks.

FINRA suggests that the new procedure will "offer greater transparency into the submission review status and introduces new user functionality to improve the submission process, including facilitating edits to submissions and easing document sharing and communication within the system." It remains to be seen if the new system will expedite the review process, but we are cautiously optimistic.