Rule 10b-17 under the Securities Exchange Act of 1934 (the “Act”) provides that the failure of an issuer to provide advance notice to regulatory authorities in connection with certain actions constitutes a manipulative or deceptive device or contrivance within the meaning of Section 10(b) of the Act. Under Rule 10b-17(b)(1), an issuer must provide the National Association of Securities Dealers (now FINRA) with 10 calendar days advance notice of certain company-related actions.

FINRA’s part in this advance disclosure system has traditionally been ministerial in nature. After all, FINRA does not maintain listing standards, and it lacks direct formal jurisdiction over issuers. Purportedly in response to a growing concern that FINRA’s company-related action processing services could be utilized to further fraudulent activities, Rule 6490, which became effective on September 27, 2010, clarifies and expands the role of FINRA in this process by providing for FINRA to become more active in the review of advance notice filings and by setting forth limited investigative powers, as well as by attaching fees and monetary penalties to the advance notification process.

Rule 6490 requires issuers of non-exchange listed equity and debt securities (specifically, issuers whose securities are quoted on the OTC Bulletin Board and Pink Sheets) to: 1) provide FINRA with a notification form at least 10 calendar days prior to the record date of the applicable company-related action; 2) pay a filing fee; and 3) supply certain supplemental and supporting documentation.

The company-related actions to which Rule 6490 applies include:

  • stock splits
  • dividends and distributions of cash or securities
  • spinoffs
  • mergers and acquisitions
  • domicile changes
  • redemptions
  • name changes
  • rights and subscription offerings
  • bankruptcy and liquidation

Under Rule 6490, FINRA now has the authority to exercise discretion in reviewing notifications and to request additional documentation when necessary. Additionally, FINRA now has the authority to conduct detailed reviews of notifications and delay requests to announce company-related action on a case by case basis. This more detailed review is only triggered if the FINRA Operations Department believes that one of the following five factors exists with respect to the notification:

  • FINRA believes the forms and other documentation submitted by the issuer are not complete, accurate, or were filed without the appropriate authority;
  • The issuer is not current with its reporting obligations to the SEC or other regulatory authority;
  • FINRA has actual knowledge that parties related to the corporate action are the subject of pending or settled regulatory action or are under investigation by a regulatory body or are pending criminal action related to fraud or securities law violations;
  • FINRA has actual knowledge that persons related to the action may potentially be involved in fraudulent activities related to the securities market or may pose a threat to public investors; or
  • There is significant uncertainty in the settlement and clearance process for the security.

You can read more about the background and rationale for the adoption of this rule in SEC Release No. 34-62434. Check back at Dodd-Frank.com frequently for the latest news and analysis relating to the implementation of the Dodd-Frank Act.