An issuer with publicly traded securities listed on a national securities exchange, like the NYSE or the NASDAQ Global Market, is obligated to give advance notice of certain corporate actions to the exchange. Because that obligation is part of the listing agreement with the exchange, the issuer is well-aware of it. An issuer with publicly traded securities not listed on a national securities exchange, such as an issuer whose shares trade over the counter (a “non-exchange issuer”), is also obligated to give notice of certain corporate actions—even though the issuer did not enter into any agreement giving rise to the obligation, may not actually be supporting the trading of its securities and may not be aware of the obligation. The non-exchange issuer must give notice of certain corporate actions to the Financial Industry Regulatory Authority (“FINRA”) under the SEC’s Rule 10b-17 and FINRA’s Rule 6490.
SEC Rule 10b-17
requires any issuer with any class of publicly traded securities to give notice to FINRA (or, if the securities are listed, to the exchange on which they are listed) of any:
- dividend or other distribution, whether in cash or in kind (except an ordinary interest payment of a debt security)
- stock split or reverse stock split
- rights or other subscription offering.
The notice must be given at least 10 days before the record date for the corporate action or, in the case of a rights or other subscription offering in which the 10 days’ notice is not practical, on or before the record date or the effective date of any registration statement for such offering (whichever is earlier). Rule 10b-17 describes the specific information required in such a notice.
FINRA Rule 6490, which was approved by the SEC last year, incorporates the notice requirements of Rule 10b-17 and also requires a non-exchange issuer to give advance notice of other corporate actions (which are defined in the rule as “Other Company-Related Actions”), including any:
change of name or change in a trading symbol merger, acquisition, dissolution or other control transaction, in each case if it has a direct impact on the publicly traded security bankruptcy or liquidation.
The notice of any Other Company-Related Action must be given to FINRA at least 10 days before the effective date of the Other Company-Related Action. The notice to FINRA of any action specified in Rule 10b-17 or any Other Company-Related Action must be given electronically through a form promulgated by FINRA.
The notice to FINRA is not merely a notice, however. Under Rule 6490, it is characterized as a request “that FINRA process documentation” regarding the corporate action. FINRA has the authority to review the notice, with the corresponding “complete” documentation required to be submitted and the applicable fee (as described below), and determine whether the submitted items are acceptable or—if FINRA considers it “necessary for the protection of investors, the public interest and to maintain fair and orderly markets”—“deficient.” The circumstances in which FINRA may make such a deficiency determination are limited to the following:
- The submitted documentation is not complete or accurate or has not been properly authorized
- The issuer is not current in its reporting obligations to the SEC or other regulatory authority
- FINRA knows that the issuer or persons associated with or related to the issuer or the corporate action are the subject of a pending or settled regulatory action, are under investigation by a regulatory authority or are subject to a civil or criminal action related to fraud or securities law violations
- FINRA knows that the issuer or persons associated with or related to the issuer or the corporate action may be potentially involved in fraudulent activities related to the securities markets or may pose a threat to public investors
- There is significant uncertainty in the settlement and clearance process for the security.
Rule 6490 includes provisions regarding a notice of deficiency from FINRA to the non-exchange issuer and the non-exchange issuer’s right to appeal such a determination. Significantly, although the Rule indicates that FINRA will “make its best efforts” to process documentation, the Rule does not specify any time period within which FINRA must conduct its review and make and give notice of its determination.
Rule 6490 includes a schedule of fees payable to FINRA by a non-exchange issuer. The fee for an issuer’s timely notice of an action specified in Rule 10b-17 is $200, but the fee for a late notice of such an action (depending on how late it is) can be as much as $5,000. The fee for a change in trading symbol is $500.
OUR TAKE: In proposing to take any corporate action covered by Rule 6490, a non-exchange issuer should be aware of the obligation to notify FINRA and obtain FINRA’s review. A failure to comply with that obligation may violate Rule 10b-17, and a delay in compliance may result not only in additional fees to FINRA, but also in a delay in effecting the corporate action and possible confusion in the market.