FINRA Rule 6490 – FINRA Compliance and Rule 6490 Lawyers

Though FINRA’s principal mandate is to regulate broker-dealers, historically it has always exercised some oversight of the over-the-counter markets including all tiers of the OTC Markets. Part of that oversight involves processing corporate action requests from issuers of equity and debt securities not listed on national securities exchanges. Significant changes to FINRA Rule 6490 were enacted in September 2010.  Prior to that time, these requests were almost always granted, even when inappropriate or submitted late.  Rule 6490 put an end to that: a nominal fee is charged for all requests, and issuers who are later to notify will be fined. In certain specific circumstances processing may be denied altogether.

The actions of which FINRA must be notified are: name changes, stock splits, stock splits, distributions of cash or securities, reinstatement of dormant public shell companies, spin-offs and other actions, and rights and subscription offerings.  In the text of the Rule 6490, FINRA notes that the SEC is concerned that “certain parties” may attempt to use corporate action requests to further fraudulent activities.

Rule 10b-17 of the Securities Exchange Act of 1934 (“Exchange Act”), requires issuers to provide FINRA with notice 10 days prior to the record date of a dividend or other distribution in cash or in kind. This often creates significant delays for issuers engaging in corporate actions such as a stock split, change of control or reverse merger transaction. Issuers that file notice of a corporate action timely pay a fee of $200.  Filing late can, however, have considerable impact on small issuers, resulting in a fee of up to $5,000 for a notification after an effective date.

Rule 10b-17 Authority for FINRA Rule 6490

Securities and Exchange Commission (“SEC”) Rule 10b-17 requires OTC issuers to notify FINRA of certain corporate actions.  The rule applies to all companies whose securities are quoted on the OTC Markets platform.

Complying with Rule 6490’s requirements may entail an unanticipated legal and compliance cost for  issuers and their securities attorneys, who may be unfamiliar with FINRA’s authority under 10b-17.  Additionally, many OTC Markets issuers are not prepared for the Depository Trust Company (“DTC”) review that may be prompted by the issuer’s corporate action notification.

Corporate Actions Impacted by FINRA Rule 6490

Rule 6490 requires advance notice to FINRA of the following corporate actions:

♦ dividends or other distributions;

♦ forward or reverse stock splits, or rights or other subscription offerings;

♦ any issuance or change to a symbol or name;

♦ mergers, acquisitions, dissolutions or other company control transactions; and

♦ bankruptcy or liquidations.

FINRA Rule 6490 Procedural Requirements

Rule 6490 requires issuers to complete and provide the required notice to FINRA at least 10 business days prior to the record date of the corporate action.  FINRA must process the corporate action for it to become effective.  In addition, FINRA may request additional documents, and conduct detailed and selective reviews of the issuer submissions which may cause the issuer to delay the announcement of its corporate action.

For some types of corporate actions, such as dividend payments or stock splits, the necessary paperwork can be handled by the issuer’s transfer agent.

Rule 10b-17 prescribes information that must be included in the notice as follows:

♦ the title of the security;

♦ date of declaration;

♦ record date;

♦ payment or distribution date;

♦ for cash distributions, the amount to be paid per share;

♦ for distribution of securities, generally the amount of the security outstanding immediately prior to and immediately following the dividend or distribution and the rate of the dividend or distribution;

♦ details of any conditions that must be satisfied to enable the payment or distribution; and

♦ additional details relating to stock or reverse splits.

Supporting Documentation Required by FINRA Rule 6490

The issuer should be prepared to provide the following documentation, which may vary depending upon the particular corporate action being taken:

♦ File-stamped copy of the original articles of incorporation from the original state of incorporation which shows the company’s current name;

♦ File-stamped articles of merger for both the acquired and acquiring issuer if a merger was completed;

♦ If an amendment to the issuer’s articles of incorporation is not required, then the issuer’s securities attorney should provide written confirmation citing the applicable law or corporate by-law;

♦ Executed and notarized resolutions appointing the current and former officers and directors and resignations from former officers and directors;

♦ Transfer Agent Verification Form from the issuer’s transfer agent;

♦ Legal opinion from a qualified securities lawyer stating that the corporate action being taken complies with applicable state law;

♦ Notarized shareholder consent approving the action; and

♦ Cover letter providing the complete corporate history of the issuer and all material facts of the corporate action being requested, starting on the original date of incorporation and including all corporate changes that have occurred from the issuer’s incorporation until present, including, but not limited to, changes of control, reverse mergers, name changes, etc.

When necessary, the issuer is also required to provide confirmation of its new CUSIP number from CUSIP Service Bureau.

Denial of Corporate Action Requests

In some circumstances, FINRA may decline to process corporate action requests. It can find a request deficient only if:

♦ staff believes that the forms and documentation submitted are incomplete, inaccurate or lack proper authority;

♦ the issuer is not current in its reporting obligations;

♦ FINRA has knowledge that parties related to the action are the subject of pending, adjudicated or settled regulatory action or investigation, or civil or criminal action related to fraud or securities law violations;

♦ a government authority has provided information indicating that persons related to the action may be involved in fraudulent activities; and

♦ there is significant uncertainty in the settlement and clearance process for the security.

An OTC issuer whose securities are publicly traded should consult with an experienced securities attorney to determine whether notice to FINRA is required before taking significant corporate actions to avoid interruptions in trading.

For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit  www.securitieslawyer101.com.   This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com