Document ID: SEC-2009-1812-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed FINRA Rule 6490 (Processing of Company-Related Actions), To Clarify the Scope of FINRA's Authority When Processing Documents Related to Announcements for Company-Related Actions for Non-Exchange Listed Securities and To Implement Fees for Such Services
Posted Date: 2009-12-28T05:00Z

[Federal Register: December 28, 2009 (Volume 74, Number 247)]
[Notices]               
[Page 68648-68651]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28de09-101]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61189; File No. SR-FINRA-2009-089]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed FINRA Rule 6490 
(Processing of Company-Related Actions), To Clarify the Scope of 
FINRA's Authority When Processing Documents Related to Announcements 
for Company-Related Actions for Non-Exchange Listed Securities and To 
Implement Fees for Such Services

December 17, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 7, 2009, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to adopt proposed FINRA Rule 6490 (Processing of 
Company-Related Actions), to clarify the scope of FINRA's regulatory 
authority and discretionary power when processing documents related to 
announcements for company-related actions for non-exchange listed 
equity and debt securities and to implement fees for such services.
    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal office of FINRA, on the 
Commission's Web site at http://www.sec.gov, and at the Commission's 
Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    FINRA is proposing to: (1) Adopt FINRA Rule 6490 (Processing of 
Company-Related Actions) to clarify the scope of FINRA's regulatory 
authority and discretionary power when processing documents related to 
announcements for company-related actions for non-exchange listed 
equity and debt securities; and (2) implement fees for such services.
FINRA's Current Role in the OTC Market
    FINRA performs several critical functions with respect to the over-
the-counter (OTC) market, including the operation of the OTC Bulletin 
Board (OTCBB), which provides a mechanism for FINRA members to quote 
certain SEC-registered OTC equity securities, and the OTC Reporting 
Facility (ORF), which provides a mechanism for FINRA members to trade 
report, for both regulatory and dissemination purposes, transactions in 
OTC equity securities.
    In addition to these functions, FINRA performs other more limited 
functions relating to the processing of non-exchange listed issuer 
company actions in the OTC market. Specifically, in furtherance of 
FINRA's obligations to foster cooperation and coordination of the 
clearing, settling and processing of transactions in equity and debt 
securities of issuers with a class of publicly traded, non-exchange 
listed securities, FINRA reviews and processes documents related to 
announcements for company-related actions pursuant to Rule 10b-17 
(Untimely Announcements of Record Dates) of the Act (``SEA Rule 10b-
17'').
    OTC issuers provide notice to FINRA to affect a full range of 
company-related actions pursuant to SEA Rule 10b-17, including 
dividends or other distributions in cash or kind, stock splits or 
reverse stock splits, or rights or other subscriptions offerings (``SEA 
Rule 10b-17 Actions''). In addition, FINRA processes documents related 
to other company actions, including the issuance or change to a trading 
symbol or company name, mergers, acquisition, dissolutions or other 
company control transactions, bankruptcy or liquidations (``Other 
Company-Related Actions''; and together with SEA Rule 10b-17 Actions, 
collectively referred to hereinafter as

[[Page 68649]]

``Company-Related Actions''). FINRA also maintains the symbols database 
for issuers. FINRA, in turn, provides notice to the marketplace of such 
events and adjusts issuers' stock prices, if necessary. These functions 
are important to trading and settlement in the OTC marketplace and help 
promote investor protection and market integrity.
    In performing these issuer-related functions, FINRA's role has been 
primarily ministerial in nature, due in large part to its limited 
jurisdictional reach. FINRA does not impose listing standards for 
securities and maintains no formal relationship with, or direct 
jurisdiction over, issuers. FINRA's authority to perform these 
functions flows primarily from two sources: SEA Rule 10b-17 and FINRA's 
Uniform Practice Code (NASD Rule 11000 Series) (``UPC''). SEA Rule 10b-
17 requires issuers with a class of publicly traded, non-exchange 
listed, securities to provide notice to FINRA generally 10-days before 
the record date involved in the following corporate actions: Dividends 
or other distributions in cash or kind, stock splits or reverse stock 
splits, or rights or other subscriptions offerings. The UPC sets forth 
a basic framework of rules between broker-dealers for the settlement of 
non-exchange listed securities quoted and/or traded in the OTC market.
    The SEC has expressed concern that certain parties may be 
attempting to use the facilities of FINRA, including the noted 
ministerial functions described above and requests to announce Company-
Related Actions, to further fraudulent activities.\3\ While it is 
understood that FINRA does not operate a ``listing market'' and has no 
privity with OTC issuers, FINRA's OTC operations involve a wide range 
of touch points with OTC issuers and require FINRA to carry out a 
variety of labor-intensive tasks (e.g., OTC issuers interact directly 
with FINRA operations staff to announce a full range of Company-Related 
Actions). As such, there is concern that FINRA's Company-Related Action 
processing services may potentially be utilized by parties to further 
microcap fraud on the part of the OTC issuers and penny stock 
promoters.
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    \3\ See, for example, SEC Order of Suspension of Trading In the 
Matter of Andros Isle, Corporation, et al. [sic], dated March 13, 
2008 (File No. 500-1), wherein the SEC suspended trading pursuant to 
SEA Section 12(k), in the securities of approximately 26 Pink Sheet 
securities stating ``[c]ertain persons appear to have usurped the 
identity of a defunct or inactive publicly traded corporation, 
initially by incorporating a new entity using the same name, and 
then by obtaining a new CUSIP number and ticker symbol based on the 
apparently false representation that they were duly authorized 
officers, directors and/or agents of the original publicly traded 
corporation.'' See also, SEC v. Irwin Boock, Stanton B.J. DeFreitas, 
Nicolette D. Loisel, Roger L. Shoss, and Jason C. Wong, Birte Boock, 
and 1621566 Ontario, Inc., Civil Action No. 09 CV 8261 (S.D.N.Y.) 
(DLC), Litigation Release No. 21243/October 8, 2009 (SEC Charges 
Five With Dozens of Fraudulent Corporate Hijackings and Unregistered 
Offerings of Securities and Names Two Relief Defendants).
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Proposal
    FINRA is proposing to adopt new FINRA Rule 6490 (Processing of 
Company-Related Actions) that would clarify the scope of FINRA's 
regulatory authority and discretionary power when reviewing and 
processing documents related to requests for Company-Related Actions. 
In addition, FINRA is also proposing to implement fees for such 
services to more equitably allocate costs related to the processing of 
Company-Related Actions. The proposed rule would codify the authority 
of FINRA's Department of Operations (Department) 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.
    Specifically, the proposed rule would establish procedures for the 
submission, review, and determination of Company-Related Actions. The 
proposed rule would permit the Department to prescribe the forms, 
supporting documentation and procedures necessary to conduct more in-
depth reviews of OTC issuer Company-Related Actions. Specifically, the 
proposed rule would provide that an issuer or other duly authorized 
representative of the issuer (``Requesting Party'') must submit a 
request for FINRA to review and process documentation related to an SEA 
Rule 10b-17 Action or Other Company-Related Action within the time 
frames specified by either SEA Rule 10b-17 \4\ or, for Other Company-
Related Actions no later than ten (10) calendar days prior to the 
effective date of the company action. All such requests must be 
accompanied by proof of payment of a non-refundable fee specified in 
the proposed fee table. In addition, the proposed rule would provide 
that initial symbol set up requests may also be submitted by members or 
associated persons of members in order to comply with regulatory 
reporting requirements.
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    \4\ SEA Rule 10b-17 provides that notice must be given to FINRA 
no later than 10 days prior to the record date involved or, in case 
of a rights subscription or other offering, if such 10 days advance 
notice is not practical, on or before the record date and in no 
event later than the effective date of the registration statement to 
which the offering relates. For example, an issuer of non-exchange 
listed publicly traded securities that is planning a stock split on 
shares of its common stock to holders of record on February 25 would 
be required under SEA Rule 10b-17 to provide written notice to FINRA 
no later than 10 days prior to the record date for such transaction, 
or by February 15.
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    However, in recognition of the lack of privity FINRA has with OTC 
issuers, FINRA is proposing to adopt Supplementary Material .02 
(Requests by Third-Parties), which would permit FINRA, in its 
discretion, to announce a Company-Related Action when it is contacted 
by a third party, such as The Depository Trust & Clearing Corporation 
(DTCC), foreign exchanges or regulators, members or associated persons. 
FINRA would request that the third-party contact the issuer in question 
regarding its obligations under SEA Rule 10b-17 or other rules and 
regulations, as applicable, and instruct the issuer to contact FINRA 
directly to provide notice and complete the requisite forms. However, 
FINRA may in its discretion review and process a Company-Related Action 
based on information from a third-party when it believes such action is 
necessary for the protection of the market and investors and/or FINRA 
has been unable to obtain notification of the Company-Related Action 
from the issuer.
    The proposed rule would permit the Department to request additional 
information or documentation as may be necessary for the Department to 
verify the accuracy of the information submitted by the Requesting 
Party. If the Requesting Party does not sufficiently respond within 90 
calendar days of the date the Department requests additional 
information or documentation, the request will be deemed ``lapsed'' and 
will be closed.
    The proposed rule would also provide that where a Company-Related 
Action is deemed deficient, the Department may determine that it is 
necessary for the protection of investors, the public interest and to 
maintain fair and orderly markets, that documentation related to a 
Company-Related Action will not be processed.
    Factors that may be considered by the Department in finding a 
request to process documentation deficient are explicitly limited to 
the following: (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 SEC 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

[[Page 68650]]

or securities laws violations \5\; (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.
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    \5\ This would include instances where FINRA has actual 
knowledge that the SEC has issued an order pursuant to Section 12(k) 
of the Exchange Act temporarily suspending the issuer's securities 
or pursuant to Section 12(j) of the Exchange Act revoking 
registration of the issuer's securities.
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    Following a determination by the Department that a request to 
process a Company-Related Action is deficient, the Department must 
provide written notice to the Requesting Party. Such written notice 
shall state the specific factor(s) that caused the request to be deemed 
deficient. A Requesting Party may appeal such determination to a three-
member subcommittee comprised of current or former industry members of 
FINRA's Uniform Practice Code Committee in writing within seven (7) 
calendar days after service of the notice. The written request for an 
appeal must be accompanied by proof of payment of the non-refundable 
Action Determination Appeal Fee and must set forth with specificity any 
and all defenses to the Department's determination that a request was 
deficient. An appeal to the subcommittee will operate to stay the 
processing of the Company-Related Action (i.e., the requested Company-
Related Action shall not be processed during the period that the 
Requesting Party requests an appeal or while any such appeal is 
pending). The subcommittee will convene once each calendar month to 
consider all appeals received during the prior month and will render a 
determination within three (3) business days following the day the 
appeal is considered by the subcommittee. The subcommittee's 
determination will constitute final action by FINRA. If the Requesting 
Party fails to file a written request for an appeal within seven (7) 
calendar days after service of notice, the Department's determination 
shall constitute final action by FINRA.
    In addition, FINRA is proposing to establish fees for Requesting 
Parties submitting documentation to announce a Company-Related Action. 
The proposed fees would include late fees for Requesting Parties that 
fail to provide timely notice of Company-Related Actions. FINRA 
believes that late fees will encourage OTC issuers to meet the various 
deadlines, including those associated with SEA Rule 10b-17, which is 
critical to enable FINRA to process such requests in a timely fashion 
in order to provide adequate notice to market participants. In 
addition, the proposed fees will also prove beneficial in that they 
will offset some of the significant costs that FINRA is currently 
bearing for the benefit of OTC issuers that are not otherwise paying to 
support the OTC symbol database and OTC issuer Company-Related Action 
processing.
    Specifically, FINRA is proposing to charge the following non-
refundable fees for the review and processing of documentation related 
to SEA Rule 10b-17 Actions and Other Company-Related Actions:

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

    However, in recognition of the critical nature of SEA Rule 10b-17 
information to the marketplace, FINRA is proposing to adopt 
Supplementary Material .01 (SEA Rule 10b-17 Fee Accumulations), which 
would permit FINRA to process documentation for Company-Related 
Actions, absent a determination that the action is deficient, even if 
the fee is not paid. All unpaid SEA Rule 10b-17 Action fees associated 
with a specific OTC issuer would be accumulated and FINRA would not 
process Voluntary Symbol Request Changes until all unpaid accumulated 
fees are paid. FINRA believes that this accumulation authority would 
create incentives for issuers that are not otherwise subject to FINRA's 
direct jurisdiction, to comply with the requirements of this rule 
without compromising FINRA's investor protection mission. Acceptance 
and processing of ``late'' Company-Related Action requests and related 
fees by FINRA, will not act to relieve an issuer of potential 
violations of SEA Rule 10b-17 or other Federal, State or SRO rules.
    In addition, in connection with mandatory symbol set ups or 
changes, FINRA generally assigns issuers random symbols. As a result, 
FINRA will not charge a voluntary symbol request change fee in 
connection with a mandatory symbol change that results from an SEA Rule 
10b-17 Action (i.e., a mandatory symbol change required because of a 
CUSIP number change or otherwise in direct connection with an SEA Rule 
10b-17 Action will not require the payment of the Voluntary Symbol 
Request Change fee). However, the request (and granting, subject to 
symbol availability) of a specific symbol in connection with an SEA 
Rule 10b-17 Action will result in such a fee being assessed in addition 
to the requisite SEA Rule 10b-17 Action fee.
    FINRA will announce the effective date of the proposed rule change 
in a Regulatory Notice. The effective date will be no later than 90 
days following Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\6\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative

[[Page 68651]]

acts and practices, to promote just and equitable principles of trade, 
and, in general, to protect investors and the public interest, and 
Section 15A(b)(5) of the Act,\7\ which requires, among other things, 
that FINRA rules provide for the equitable allocation of reasonable 
dues, fees and other charges among members and issuers and other 
persons using any facility or system that FINRA operates or controls. 
FINRA believes that the proposed rule will codify FINRA's authority and 
discretion to review and process documents related to requests for 
Company-Related Actions in the OTC securities and, along with the 
proposed new fees for such services, act to ensure there is more 
complete, accurate and timely information concerning Company-Related 
Actions.
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    \6\ 15 U.S.C. 78o-3(b)(6).
    \7\ 15 U.S.C. 78o-3(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Exchange Act. Comments may be submitted 
by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2009-089 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2009-089. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/
rules/sro.shtml). Copies of the submission,\8\ all subsequent 
amendments, all written statements with respect to the proposed rule 
change that are filed with the Commission, and all written 
communications relating to the proposed rule change between the 
Commission and any person, other than those that may be withheld from 
the public in accordance with the provisions of 5 U.S.C. 552, will be 
available for inspection and copying in the Commission's Public 
Reference Room, 100 F Street, NE., Washington, DC 20549, on official 
business days between the hours of 10 a.m. and 3 p.m. Copies of the 
filing also will be available for inspection and copying at the 
principal office of FINRA. All comments received will be posted without 
change; the Commission does not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make available publicly. All submissions should refer to File Number 
SR-FINRA-2009-089 and should be submitted on or before January 19, 
2010.
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    \8\ The text of the proposed rule change is available on the 
Commission's Web site at http://www.sec.gov/.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-30597 Filed 12-24-09; 8:45 am]

BILLING CODE 8011-01-P