Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving 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, 39603-39608 [2010-16687]
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Federal Register / Vol. 75, No. 131 / Friday, July 9, 2010 / Notices
B. Self-Regulatory Organization’s
Statement on Burden on Competition
CBOE does not believe that the
proposed rule change will impose any
burden on competition that is not
necessary or appropriate in furtherance
of purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 8 and subparagraph (f)(2) of
Rule 19b–4 9 thereunder. At any time
within 60 days of the filing of the
proposed rule change, the Commission
may summarily abrogate such rule
change if it appears to the Commission
that such action is necessary or
appropriate in the public interest, for
the protection of investors, or otherwise
in furtherance of the purposes of the
Act.
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 Act.
Comments may be submitted by any of
the following methods:
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Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–CBOE–2010–066 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–CBOE–2010–066. 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 (https://www.sec.gov/
8 15
9 17
rules/sro.shtml). Copies of the
submission, 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 Web site viewing and
printing 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 such filing
also will be available for inspection and
copying at the principal office of the
Exchange. 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–CBOE–
2010–066 and should be submitted on
or before August 9, 2010.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.10
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010–16686 Filed 7–8–10; 8:45 am]
BILLING CODE P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–62434; File No. SR–FINRA–
2009–089]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Order Approving
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 NonExchange Listed Securities and To
Implement Fees for Such Services
July 1, 2010.
I. Introduction
On December 7, 2009, Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (‘‘Commission’’),
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(2).
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CFR 200.30–3(a)(12).
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39603
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
proposed FINRA Rule 6490 (Processing
of Company-Related Actions), to clarify
the scope of FINRA’s regulatory
authority and discretionary power when
processing documents relating to
announcements for company-related
actions for non-exchange listed equity
and debt securities (collectively ‘‘OTC
Securities’’) and to implement fees for
such services. The proposed rule change
was published for comment in the
Federal Register on December 28,
2009.3 The Commission received two
comment letters on the proposed rule
change,4 and a letter from FINRA
responding to the comment letters.5
This order approves the proposed rule
change.
II. Background
FINRA performs several critical
functions in the over-the-counter
(‘‘OTC’’) market. FINRA currently
operates the OTC Bulletin Board
(‘‘OTCBB’’), which provides a
mechanism for FINRA members to
quote certain registered OTC equity
securities. FINRA also operates the OTC
Reporting Facility, which provides a
mechanism for FINRA members to
report, for both regulatory and
dissemination purposes, transactions in
OTC equity securities. More broadly,
FINRA also oversees the activities of
broker-dealer member firms, and their
associated persons, that quote and trade
OTC Securities to ensure their
compliance with the Federal securities
laws and FINRA rules.
In addition to these functions, FINRA
reviews and processes requests to
announce or publish certain actions
taken by issuers of OTC Securities.
FINRA performs other more limited
functions relating to the processing of
certain actions by non-exchange listed
companies whose securities are traded
in the OTC market. In this regard,
FINRA reviews and processes
documents relating to announcements
for company-related actions pursuant to
Rule 10b–17 under the Act (‘‘Rule 10b–
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 61189
(December 17, 2009), 74 FR 68648 (‘‘Notice’’).
4 See Letter to Elizabeth M. Murphy, Secretary,
Commission, from Liz Heese, Managing Director,
Issuer Services, Pink OTC Markets, Inc. (‘‘Pink
OTC’’), dated January 20, 2010 (‘‘Pink OTC Letter’’),
and Letter to Elizabeth M. Murphy, Secretary,
Commission, from Stephen J. Nelson, The Nelson
Law Firm, LLC (‘‘Nelson Law Firm’’), dated
February 18, 2010 (‘‘Nelson Law Firm Letter’’).
5 See Letter from Kosha K. Dalal, Associate Vice
President and Associate General Counsel, FINRA, to
Elizabeth M. Murphy, Secretary, Commission, dated
April 30, 2010 (‘‘FINRA Response Letter’’).
2 17
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17 Actions’’).6 These documents include
announcements of dividends or other
distributions in cash or in kind, stock
splits or reverse stock splits, or rights or
other subscriptions offerings. FINRA
also reviews requests to process
documents relating to other company
actions (‘‘Other Company-Related
Actions’’), including the issuance or
change to a trading symbol or company
name, merger, acquisition, dissolution
or other company control transactions,
bankruptcy or liquidation.7 In addition,
FINRA maintains the symbols database
for OTC Securities. Based on
information it receives regarding
Company-Related Actions, FINRA, in
turn, provides notice to the marketplace
of such events and adjusts names,
symbols, and the issuers’ stock prices, if
necessary. According to FINRA, these
functions are important both to the
trading of securities in the OTC
marketplace and to the settlement of
transactions involving OTC Securities.
FINRA notes that the issuer-related
services it performs are aimed not only
at facilitating trading and settlement,
but also at promoting investor
protection and market integrity.
Historically, FINRA has viewed its
role in performing issuer-related
functions as primarily ministerial, 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 issuer-related
functions flows primarily from two
sources: Rule 10b–17 under the Act and
FINRA’s Uniform Practice Code (NASD
Rule 11000 Series) (‘‘UPC’’).8 Recently,
6 17 CFR 240.10b–17. Rule 10b–17 requires
issuers to give FINRA, in a timely fashion,
information relating to: (1) A dividend or other
distribution in cash or in kind; (2) a stock split or
reverse split; and (3) a rights or other subscription
offering. Under Rule 10b–17, the issuer is required
to provide this information to FINRA no later than
10 days prior to the record date 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 offer
relates. Pursuant to Rule 10b–17(b)(3), comparable
notice given by the issuer of an exchange-listed
security in accordance with the procedures of the
national securities exchange upon which a security
of such issuer is registered satisfies this
requirement.
7 Rule 10b–17 Actions and Other CompanyRelated Actions collectively are referred to herein
as ‘‘Company-Related Actions.’’ FINRA publishes
Company-Related Actions pursuant to requests
from issuers and their agents on its Web site in a
document known as the ‘‘Daily List.’’ Publication of
Company-Related Actions in the Daily List
effectively announces the Company-Related Action
to the OTC market.
8 The UPC sets forth a basic framework of rules
governing broker-dealers with respect to the
settlement of OTC Securities.
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there has been growing concern that
FINRA’s Company-Related Action
processing services may potentially be
used by certain parties to further
fraudulent activities.9 Accordingly, in
furtherance of its authority to adopt
rules to prevent fraudulent and
manipulative acts and practices,
promote just and equitable principles of
trade, and protect investors and the
public interest, FINRA proposes Rule
6490 to clarify the scope of its
regulatory authority and to codify
procedures that it will apply when
reviewing requests to process CompanyRelated Actions. FINRA also proposes to
establish fees for its review and
processing of documentation relating to
Rule 10b–17 Actions and Other
Company-Related Actions, as well as a
fee for appealing FINRA staff
determinations.
III. Description of the Proposal
A. Processing Announcements of
Company Related Actions
Rule 6490 would codify the authority
of FINRA’s Department of Operations
(‘‘Department’’) to conduct in-depth
reviews of requests to process CompanyRelated Actions and to provide FINRA
staff the discretion not to process
incomplete requests and requests for
which there are certain indicators of
potential fraud. Specifically, the
proposed rule would establish
procedures for the submission, review,
and determination of the sufficiency of
requests made to FINRA to process
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 requests to process
Company-Related Actions. The
proposed rule would require that an
issuer or other duly authorized
representative of the issuer (‘‘Requesting
9 See, e.g., Commission Order of Suspension of
Trading In the Matter of Andros Isle, Corporation,
et al., dated March 13, 2008 (File No. 500–1), in
which the Commission suspended trading pursuant
to Section 12(k) of the Act, 15 U.S.C. 78l(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) (Commission Charges Five With
Dozens of Fraudulent Corporate Hijackings and
Unregistered Offerings of Securities and Names
Two Relief Defendants).
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Party’’) submit a request for FINRA to
review and process documentation
related to a Rule 10b–17 Action or Other
Company-Related Action within the
time frames specified by either Rule
10b–17, in the event of a Rule 10b–17
Action, or no later than ten calendar
days prior to the effective date of the
Company-Related Action in the event of
Other Company-Related Actions. The
proposed rule would require all such
requests to be accompanied by proof of
payment of a non-refundable fee
specified in the fee table that would be
included in Rule 6490, as more fully
described below. In addition, the
proposed rule would provide that initial
symbol set up requests may be
submitted by FINRA members or their
associated persons in order to comply
with regulatory reporting requirements.
In recognition of FINRA’s lack of
privity with issuers of OTC Securities,
FINRA is proposing to adopt
Supplementary Material .02 (Requests
by Third-Parties) to Rule 6490, 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 (‘‘DTC’’), foreign exchanges
or regulators, or members or associated
persons. FINRA would request that the
third party contact the issuer in
question regarding the issuer’s
obligations under 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
would, in its discretion, be permitted to
review and process a Company-Related
Action based on information from a
third party when it believes that such
action is necessary for the protection of
investors and the public interest and to
maintain fair and orderly markets, 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 would be deemed ‘‘lapsed’’ and
then closed. The proposed rule also
would provide that if a request to
process a Company-Related Action is
deficient, and the Department
determines that it is necessary for the
protection of investors and the public
interest and to maintain fair and orderly
markets, the Department may determine
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Federal Register / Vol. 75, No. 131 / Friday, July 9, 2010 / Notices
that documentation related to a
Company-Related Action shall not be
processed.
The proposal sets forth five factors
that the Department can consider in
determining whether a request to
process documentation is deficient: (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 Commission 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 or securities laws
violations; 10 (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.
Following a Department
determination that a request to process
a Company-Related Action is deficient,
the Department would be required to
provide written notice to the Requesting
Party. Such written notice would be
required to state the specific factor(s)
that caused the request to be deemed
deficient. The proposal permits a
Requesting Party to appeal a deficiency
determination to a three-member
subcommittee comprised of current or
former industry members of FINRA’s
UPC Committee in writing within seven
calendar days after service of the notice.
Any written request for an appeal would
be required to: (1) Be accompanied by
proof of payment of a non-refundable
Action Determination Appeal Fee; and
(2) specifically set forth any and all
defenses to the Department’s deficiency
determination. Under the proposal, an
appeal would stay the processing of the
Company-Related Action (i.e., the
requested Company-Related Action
would not be processed during the
period that the Requesting Party
requests an appeal or while any such
appeal is pending).
Under the proposal, the subcommittee
would convene once each calendar
month to consider all appeals received
during the prior month and would
render a determination within three
business days following the day the
subcommittee considered the appeal.
The subcommittee’s determination
would constitute final FINRA action. If
a Requesting Party fails to file a written
39605
request for an appeal within seven
calendar days after service of notice, the
Department’s deficiency determination
would constitute final FINRA action.
B. Fees
FINRA also proposes to establish fees
in connection with its review and
processing of Company-Related Actions.
The proposed fees would include late
fees for Requesting Parties that fail to
provide timely notice of and requests to
process Company-Related Actions.
According to FINRA, the proposed late
fees would help encourage issuers of
OTC Securities to meet deadlines,
including those associated with Rule
10b–17, which are critical to enabling
FINRA to process such requests in a
timely fashion in order to provide
adequate notice to market participants.
Further, FINRA states that the proposed
fees would be beneficial because they
would offset some of the significant
costs that FINRA currently bears for the
benefit of issuers of OTC Securities that
are not otherwise paying to support the
OTC symbol database and the
processing of Company-Related Actions.
Specifically, FINRA proposes to
charge the following non-refundable
fees for the review and processing of
documentation related to Rule 10b–17
Actions and Other Company-Related
Actions:
Fee
Rule 10b–17 Action:
Timely Rule 10b–17 Notification ............................................................................................................................................
Late Rule 10b–17 Notification Submitted at least 5 calendar days prior to Corporate Action Date .....................................
Late SEA Rule 10b–17 Notification Submitted at least 1 calendar day prior to Corporate Action Date ..............................
Late SEA Rule 10b–17 Notification Submitted on or after Corporate Action Date ...............................................................
Other Company-Related Action:
Voluntary Symbol Request Change .......................................................................................................................................
Initial Symbol Set Up ..............................................................................................................................................................
Symbol Deletion .....................................................................................................................................................................
Appeals:
Action Determination Appeal Fee ..........................................................................................................................................
$200
1,000
2,000
5,000
500
(*)
(*)
4,000
wwoods2 on DSK1DXX6B1PROD with NOTICES_PART 1
* No charge.
FINRA also proposes Supplementary
Material .01, which would permit
FINRA to process documentation for
Company-Related Actions, absent a
determination that the action is
deficient, even if the required fee is not
paid. Proposed Supplementary Material
.01 provides that unpaid Rule 10b–17
Action fees associated with a specific
issuer would be accumulated, and
further, that FINRA would not process
Voluntary Symbol Request Changes
until all accumulated fees are paid.
According to FINRA, this accumulation
authority would create incentives for
issuers that are not otherwise subject to
FINRA’s direct jurisdiction to comply
with the proposed rule’s requirements
without compromising FINRA’s investor
protection mission. FINRA states further
that acceptance and processing of
untimely Company-Related Action
requests and related fees by FINRA will
not act to relieve an issuer of potential
violations of Rule 10b–17 or other
Federal or State rules or self-regulatory
organization rules.
In addition, the Voluntary Symbol
Request Change Fee would not apply to
mandatory symbol set ups or changes.
Specifically, FINRA would not charge a
Voluntary Symbol Request Change Fee
in connection with a mandatory symbol
change that results from a Rule 10b–17
Action (i.e., a mandatory symbol change
required because of a CUSIP number
change or otherwise in direct
connection with a Rule 10b–17 Action
10 According to FINRA, this factor would include
instances when FINRA has actual knowledge of a
Commission Order pursuant to Section 12(k) of the
Act, 15 U.S.C. 78l(k), temporarily suspending the
issuer’s securities or pursuant to Section 12(j) of the
Act, 15 U.S.C. 78l(j), revoking registration of the
issuer’s securities.
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would not require the payment of the
Voluntary Symbol Request Change Fee).
However, the request (and its granting,
subject to symbol availability) of a
specific symbol in connection with a
Rule 10b–17 Action would result in
assessment of such a fee in addition to
the requisite Rule 10b–17 Action fee.
IV. Discussion and Commission’s
Findings
The Commission has reviewed
carefully the proposed rule change, the
comment letters received, and the
FINRA Response Letter and finds that
the proposal is consistent with the Act
and the rules and regulations
thereunder applicable to a national
securities association, including the
provisions of Section 15A(b)(6) of the
Act,11 which requires, among other
things, that FINRA rules be designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to foster
cooperation and coordination with
persons engaged in regulating, clearing,
settling, processing transactions in
securities, and, in general, to protect
investors and the public interest; and
Section 15A(b)(5) of the Act,12 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.13
The Commission believes that
FINRA’s proposal to codify procedures
for the submission, review, and
determination of the sufficiency of
requests to process Company-Related
Actions will benefit the OTC
marketplace and investors in OTC
Securities. The proposal clarifies
FINRA’s authority to conduct reviews of
requests to process Company-Related
Actions and reserves to FINRA the right
to process Rule 10b–17 Actions and
Other Company-Related Actions when,
notwithstanding the failure of an issuer
to timely submit a notice or pay the
applicable processing fee, such
processing is necessary for the
protection of investors and the public
interest and to maintain fair and orderly
markets. Accordingly, the Commission
believes that the proposal is designed to
encourage issuers and their agents to
provide complete, accurate and timely
information to FINRA concerning
Company-Related Actions involving
11 15
U.S.C. 78o–3(b)(6).
12 15 U.S.C. 78o–3(b)(5).
13 In approving the proposed rule change, the
Commission notes that it has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
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OTC Securities, and thereby to prevent
fraudulent and manipulative acts and
practices with respect to these
securities.
The Commission notes that the
proposal sets forth five factors that
FINRA can look to as a basis for denying
a request to process documentation
concerning a Company-Related Action:
(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 Commission 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 or securities laws
violations; 14 (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. The
Commission also notes that the proposal
includes provisions pursuant to which
an aggrieved party may appeal the
denial of a request to process a
Company-Related Action.
As noted above, the Commission
received two comment letters in
response to the proposal.15 Both
commenters generally supported the
goals of the proposal, but questioned
certain aspects of it. One commenter
requested that FINRA provide
additional guidance on two of the
factors FINRA would consider when
determining whether a request to
process documentation related to a
Company-Related Action is deficient,
namely, whether an issuer is not current
in its reporting obligations, if
applicable, to the Commission or other
regulatory authority, and whether there
is significant uncertainty in the
clearance and settlement process.16
Specifically, this commenter inquired
whether delinquent issuers would
automatically have their requests to
process a Company-Related Action
determined to be deficient, and also
whether issuers that are not designated
as eligible for the DTC’s FAST systems
would have their requests viewed as
raising significant uncertainty in the
clearance and settlement process.17
In response to this commenter, FINRA
explained that when the Department
reasonably believes that an issuer
submitting a request to process
documentation related to a CompanyRelated Action has triggered one of the
explicitly enumerated factors, the
Department would generally conduct an
in-depth review of the Company-Related
Action and seek additional information
or documentation from the issuer.18
FINRA noted that it would have the
discretion not to process any such
actions that are incomplete or when it
determines that not processing such an
action is necessary for the protection of
investors and the public interest and to
maintain fair and orderly markets.19
FINRA stated that the failure of an
issuer to remain current it its reporting
obligations is one of five factors that
FINRA ‘‘may’’ consider in making a
deficiency determination.20 FINRA
further noted that the proposal does not
mandate any particular mechanism of
clearance and settlement for an issuer’s
securities, including FAST designation
by DTC.21
The Commission believes that the
proposed factors are reasonably
designed to allow FINRA to deny a
request to process a Company-Related
Action based on the above-noted
objective criteria. As FINRA pointed
out, if FINRA believes that one of the
enumerated factors has been triggered,
FINRA staff would conduct an in depth
review and follow up with the issuer to
seek additional information or
documentation. The Commission
believes that the proposal furthers
FINRA’s goal to assure that documents
supporting a request to process a
Company-Related Action are complete
and correct and that its facilities are not
misused in furtherance of fraudulent or
manipulative acts and practices. At the
same time, the proposal recognizes the
interests of a Requesting Party in
receiving fair consideration from FINRA
in connection with a request to process
a Company-Related Action and in
having a fair process for an appeal in the
event a request to process a CompanyRelated Action is denied. The
Commission therefore finds the
proposal to be consistent with Section
15A(b)(6) of the Act.22 The Commission
17 Id.
18 See
FINRA Response Letter, supra note 5 at
3–4.
14 See
19 Id.
15 See
20 Id.
supra note 10.
Pink OTC Letter and Nelson Law Firm
Letter, supra note 4.
16 See Pink OTC Letter.
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21 Id.
22 15
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U.S.C. 78o–3(b)(6).
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Federal Register / Vol. 75, No. 131 / Friday, July 9, 2010 / Notices
notes that FINRA’s administration of its
proposed rule is subject to continuing
Commission oversight, and that FINRA,
as a registered national securities
association, remains bound by its
obligations as a self-regulatory
organization under the Act and all
relevant rules and regulations
thereunder.
Two commenters questioned the
effects of the proposed fees.23
Specifically, one commenter expressed
concern that the proposal would permit
FINRA to decline to set an ex-dividend
date for distributions of ‘‘Liquidating
OTC Securities’’ if an issuer failed to
timely notify FINRA of an upcoming
distribution, as required by Rule 10b–
17, and pay the required processing
fee.24 According to this commenter, a
failure by FINRA to set an ex-dividend
date for these securities would ‘‘burden
transactions in Liquidating OTC
Securities with wholly unnecessary
risks and transaction costs’’ and
potentially permit FINRA to ‘‘escape
from its responsibilities under Section
15A’’ of the Act when the required fee
is not paid.25
In response to this concern, FINRA
clarified that the proposal expressly
permits FINRA to set ex-dividend dates,
as well as process other CompanyRelated Actions, in certain
circumstances even if FINRA fails to
receive the required notice and
accompanying fee from the issuer. In
particular, FINRA noted that the text of
proposed Supplementary Material .01
(SEA Rule 10b–17 Fee Accumulations)
states that ‘‘notwithstanding the
timeliness of the SEA Rule 10b–17
Action submission or the failure to pay
applicable fees, FINRA will make its
best efforts to process documentation
related to SEA Rule 10b–17 Actions that
are not otherwise deemed incomplete or
otherwise deficient by FINRA because
of the critical nature of this information
to the marketplace.’’ 26 Similarly, FINRA
noted that the rule text of proposed
Supplementary Material .02 (Requests
by Third-Parties) provides that when
FINRA is unable to obtain notification
from an issuer, it may in its discretion
review and process a Rule 10b–17
Action or Other Company-Related
Action based on information from a
third-party, such as DTC, foreign
exchanges or regulators, or members or
23 See Pink OTC Letter and Nelson Law Firm
Letter, supra note 4.
24 See Nelson Law Firm Letter. This commenter
defines ‘‘Liquidating OTC Securities’’ as securities
whose issuers are ‘‘bankrupt, in liquidation, or
involved in various forms of reorganization.’’
25 Id.
26 See FINRA Response Letter, supra note 5 at 2–
3.
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15:17 Jul 08, 2010
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associated persons, when it believes
such action is necessary under its
statutory obligations.27
One commenter noted that issuers of
OTC Liquidating Securities may believe
that they are not obligated to provide a
Rule 10b–17 notice to FINRA,
particularly, if, for example a
bankruptcy trustee views its obligations
to maximize the value of the issuer’s
estate to be in conflict with payment of
processing fees to FINRA.28 In response
to this comment, FINRA remarked that
an issuer that files for bankruptcy, or a
trustee acting on its behalf, faces
numerous fees and charges in an effort
to discharge the issuer’s obligations and
stated that it saw no reason why its
proposed fees should not apply to these
issuers.29
The other commenter questioned
whether the proposed fees for providing
Company-Related Action processing
services might cause issuers to effect
corporate actions without notifying
FINRA.30 In response to this point,
FINRA noted that an issuer that fails to
notify FINRA of a proposed corporate
action, as required by Rule 10b–17 is
potentially violating an anti-fraud rule
of the Federal securities laws and stated
that where it has actual knowledge of
issuer non-compliance with Rule 10b–
17, FINRA will use its best efforts to
notify the Commission.31 According to
FINRA, non-compliance with Rule 10b–
17 has been an ongoing concern, and it
suggested that heightened awareness of
Rule 10b–17 that could result from
adoption of the proposal, graduated fees
for delayed compliance with Rule 10b–
17, and the potential for referral to the
Commission for non-compliance may
lead issuers to proceed more cautiously
in this area.32
The Commission finds that FINRA’s
proposed fees to review requests to
process Company-Related Actions are
consistent with the Act. The
Commission believes that the proposed
fees are reasonable because they are
intended to offset some of the
significant costs FINRA currently incurs
in processing Company-Related Actions
27 Id.
Nelson Law Firm Letter supra note 4 at 3.
FINRA Response Letter, supra note 5 at 2.
30 See Pink OTC Letter, supra note 4 at 2.
31 See FINRA Response Letter, supra note 5 at 5.
32 See id at 6. FINRA also stated that if its
proposal is approved, it (i) will notify issuers of the
proposed rule and fees by issuing a Regulatory
Notice, sending out alerts through electronic
platforms used by market participants, and posting
this information on its dedicated Web page for OTC
Actions; (ii) will reach out to industry groups
involved in issuer corporate actions to notify parties
that will be impacted by the proposal; and (iii)
expects the percentage of late notifications will
decline over time.
PO 00000
28 See
29 See
Frm 00115
Fmt 4703
Sfmt 4703
39607
and that they are equitably allocated
because they apply to any Requesting
Party that submits a request to process
a Company-Related Action (other than
those enumerated actions for which no
fees would be charged). The
Commission believes that FINRA has
adequately responded to commenters’
concerns about the impact of the
proposed fees.
Finally, one commenter offered
suggestions relating to the operation of
the proposed rule.33 In response to the
comment that FINRA should limit intraday processing of Company-Related
Actions to emergency situations such as
security revocations and quotation and
trading halts, FINRA explained that,
with the exception of security
revocations, quotation and trading halts,
and cancellation of securities pursuant
to an effective bankruptcy court order,
its general policy is to announce actions
on the Daily List published on
OTCBB.com with a future effective date,
but that in some cases, often because of
failure to receive timely notification,
setting a future effective date is not
possible.34 This commenter also
suggested that FINRA coordinate
processing of Company-Related Actions
across FINRA departments and ensure
information regarding Company-Related
Actions is disseminated accurately and
consistently on the Daily List on the
OTCBB.com and NasdaqTrader Web
sites.35 In response to these comments,
FINRA noted that, although FINRA
departments work closely in this regard,
not all systems and platforms used by
market participants to access such data
are controlled by FINRA, and there
could be a lag in the dissemination of
certain information.36 FINRA also noted
that because the NasdaqTrader Web site
simply provides a hyperlink to the
OTCBB.com Daily List, there should be
no inconsistencies in information on
these two Web sites.37 The Commission
believes that FINRA has adequately
responded to the commenters’
suggestions relating to the operation of
the proposed rule.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act, that the
proposed rule change (SR–FINRA–
2009–89), be, and it hereby is, approved.
33 See
Pink OTC Letter, supra note 4.
FINRA Response Letter, supra note 5.
35 See Pink OTC Letter, supra note 4.
36 See FINRA Response Letter, supra note 5.
37 Id.
34 See
E:\FR\FM\09JYN1.SGM
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39608
Federal Register / Vol. 75, No. 131 / Friday, July 9, 2010 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.38
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010–16687 Filed 7–8–10; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–62443; File No. SR–CBOE–
2010–064]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Expand Its $1 Strike
Program
July 2, 2010.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that, on July 1,
2010, the Chicago Board Options
Exchange, Incorporated (the ‘‘Exchange’’
or ‘‘CBOE’’) filed with the Securities and
Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
CBOE proposes to amend Rule 5.5.01
to expand the Exchange’s $1 Strike Price
Program (the ‘‘$1 Strike Program’’ or
‘‘Program’’) to allow the Exchange to
select 150 individual stocks on which
options may be listed at $1 strike price
intervals. The text of the rule proposal
is available on the Exchange’s website
(https://www.cboe.org/legal), at the
Exchange’s principal office, and at the
Commission’s Public Reference Room.
wwoods2 on DSK1DXX6B1PROD with NOTICES_PART 1
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization 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 those statements may be examined at
the places specified in Item IV below.
38 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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15:17 Jul 08, 2010
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The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of this proposed rule
change is to expand the $1 Strike
Program.3
The $1 Strike Program currently
allows CBOE to select a total of 55
individual stocks on which option
series may be listed at $1 strike price
intervals. In order to be eligible for
selection into the Program, the
underlying stock must close below $50
in its primary market on the previous
trading day. If selected for the Program,
the Exchange may list strike prices at $1
intervals from $1 to $50, but no $1 strike
price may be listed that is greater than
$5 from the underlying stock’s closing
price in its primary market on the
previous day. The Exchange may also
list $1 strikes on any other option class
designated by another securities
exchange that employs a similar
Program under their respective rules.
The Exchange may not list long-term
option series (‘‘LEAPS’’) 4 at $1 strike
price intervals for any class selected for
the Program, except as specified in
subparagraph (2) to Interpretation and
Policy .01 to Rule 5.5.5 The Exchange is
also restricted from listing series with
$1 intervals within $0.50 of an existing
strike price in the same series, except
that strike prices of $2, $3, and $4 shall
3 The Commission approved the Program as a
pilot on June 5, 2003. See Securities Exchange Act
Release No. 47991 (June 5, 2003), 68 FR 35243 (June
12, 2003). The Program was subsequently extended
through June 5, 2008. See Securities Exchange Act
Release No. 49799 (June 3, 2004), 69 FR 32642 (June
10, 2004) (SR–CBOE–2004–34); SEC Release No.
51771 (May 31, 2005), 70 FR 33228 (June 7, 2005)
(SR–CBOE–2005–37); SEC Release No. 53805 (May
15, 2006), 71 FR 29690 (May 23, 2006) (SR–CBOE–
2006–31); and SEC Release No. 55673 (April 26,
2007), 72 FR 24646 (May 3, 2007) (SR–CBOE–2007–
38). The Program was subsequently expanded and
permanently approved in 2007. See Exchange Act
Release No. 57049 (December 27, 2007), 73 FR 528
(January 3, 2008) (SR–CBOE–2007–125). The
Program was last expanded in 2009. See Securities
Exchange Act Release No. 59587 (March 17, 2009),
74 FR 12414 (March 24, 2009) (SR–CBOE–2009–01).
4 LEAPS are long-term options that generally have
up to thirty-nine months from the time they are
listed until expiration. See Rule 5.8, Long-Term
Equity Option Series (LEAPS ®). Long-term FLEX
options and index options are considered separately
in Rules 24A.4, 24B.4 and 24.9(b), respectively.
5 Interpretation and Policy .01(a)(3) states that the
Exchange may list $1 strike prices up to $5 in
LEAPS in up to 200 option classes in individual
stocks. See Securities Exchange Act Release No.
60978 (November 10, 2009), 74 FR 59296
(November 17, 2009) (SR–CBOE–2009–068).
PO 00000
Frm 00116
Fmt 4703
Sfmt 4703
be permitted within $0.50 of an existing
strike price for classes also selected to
participate in the $0.50 Strike Program.6
The Exchange now proposes to
expand the Program to allow CBOE to
select a total of 150 individual stocks on
which option series may be listed at $1
strike price intervals. The existing
restrictions on listing $1 strikes would
continue, i.e., no $1 strike price may be
listed that is greater than $5 from the
underlying stock’s closing price in its
primary market on the previous day,
and CBOE is restricted from listing any
series that would result in strike prices
being $0.50 apart (unless an option class
is selected to participate in both the $1
Strike Program and the $0.50 Strike
Program).
As stated in the Commission order
that initially approved CBOE’s Program
and in subsequent extensions and
expansions of the Program,7 CBOE
believes that $1 strike price intervals
provide investors with greater flexibility
in the trading of equity options that
overlie lower price stocks by allowing
investors to establish equity options
positions that are better tailored to meet
their investment objectives.
During the time that the $1 Strike
Program was a pilot, the Exchange
submitted three pilot reports to the
Commission in which the Exchange
discussed, among other things, the
strength and efficacy of the Program
based upon the steady increase in
volume and open interest of options
traded on the Exchange at $1 strike
price intervals; and that the Program
had not and, in the future, should not
create capacity problems for CBOE or
the Options Price Reporting Authority
(‘‘OPRA’’) systems.8 This has not
changed. Moreover, the number of $1
strike options traded on the Exchange
has continued to increase since the
inception of the Program such that these
options are now among some of the
6 Regarding the $0.50 Strike Program, which
allows $0.50 strike price intervals for options on
stocks trading at or below $3.00, see Interpretation
and Policy .01(b) to Rule 5.5 and Securities
Exchange Act Release No. 60695 (September 18,
2009), 74 FR 49055 (September 25, 2009) (SR–
CBOE–2009–069). See also Securities Exchange Act
Release No. 61331 (January 12, 2010), 75 FR 2911
(January 19, 2010) (SR–CBOE–2010–002) (allowing
concurrent listing of $3.50 and $4 strikes for classes
that participate in both the $0.50 Strike Program
and the $1 Strike Program).
7 See supra note 1.
8 See Securities Exchange Act Release Nos. 49799
(June 3, 2004), 69 FR 32642 (June 10, 2004) (SR–
CBOE–2004–34); 51771 (May 31, 2005), 70 FR
33228 (June 7, 2005) (SR–CBOE–2005–37); 53805
(May 15, 2006), 71 FR 29690 (May 23, 2006) (SR–
CBOE–2006–31); and 55673 (April 26, 2007), 72 FR
24646 (May 3, 2007) (SR–CBOE–2007–38).
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]]>Agencies
[Federal Register Volume 75, Number 131 (Friday, July 9, 2010)]
[Notices]
[Pages 39603-39608]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-16687]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62434; File No. SR-FINRA-2009-089]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving 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
July 1, 2010.
I. Introduction
On December 7, 2009, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\
proposed FINRA Rule 6490 (Processing of Company-Related Actions), to
clarify the scope of FINRA's regulatory authority and discretionary
power when processing documents relating to announcements for company-
related actions for non-exchange listed equity and debt securities
(collectively ``OTC Securities'') and to implement fees for such
services. The proposed rule change was published for comment in the
Federal Register on December 28, 2009.\3\ The Commission received two
comment letters on the proposed rule change,\4\ and a letter from FINRA
responding to the comment letters.\5\ This order approves the proposed
rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 61189 (December 17,
2009), 74 FR 68648 (``Notice'').
\4\ See Letter to Elizabeth M. Murphy, Secretary, Commission,
from Liz Heese, Managing Director, Issuer Services, Pink OTC
Markets, Inc. (``Pink OTC''), dated January 20, 2010 (``Pink OTC
Letter''), and Letter to Elizabeth M. Murphy, Secretary, Commission,
from Stephen J. Nelson, The Nelson Law Firm, LLC (``Nelson Law
Firm''), dated February 18, 2010 (``Nelson Law Firm Letter'').
\5\ See Letter from Kosha K. Dalal, Associate Vice President and
Associate General Counsel, FINRA, to Elizabeth M. Murphy, Secretary,
Commission, dated April 30, 2010 (``FINRA Response Letter'').
---------------------------------------------------------------------------
II. Background
FINRA performs several critical functions in the over-the-counter
(``OTC'') market. FINRA currently operates the OTC Bulletin Board
(``OTCBB''), which provides a mechanism for FINRA members to quote
certain registered OTC equity securities. FINRA also operates the OTC
Reporting Facility, which provides a mechanism for FINRA members to
report, for both regulatory and dissemination purposes, transactions in
OTC equity securities. More broadly, FINRA also oversees the activities
of broker-dealer member firms, and their associated persons, that quote
and trade OTC Securities to ensure their compliance with the Federal
securities laws and FINRA rules.
In addition to these functions, FINRA reviews and processes
requests to announce or publish certain actions taken by issuers of OTC
Securities. FINRA performs other more limited functions relating to the
processing of certain actions by non-exchange listed companies whose
securities are traded in the OTC market. In this regard, FINRA reviews
and processes documents relating to announcements for company-related
actions pursuant to Rule 10b-17 under the Act (``Rule 10b-
[[Page 39604]]
17 Actions'').\6\ These documents include announcements of dividends or
other distributions in cash or in kind, stock splits or reverse stock
splits, or rights or other subscriptions offerings. FINRA also reviews
requests to process documents relating to other company actions
(``Other Company-Related Actions''), including the issuance or change
to a trading symbol or company name, merger, acquisition, dissolution
or other company control transactions, bankruptcy or liquidation.\7\ In
addition, FINRA maintains the symbols database for OTC Securities.
Based on information it receives regarding Company-Related Actions,
FINRA, in turn, provides notice to the marketplace of such events and
adjusts names, symbols, and the issuers' stock prices, if necessary.
According to FINRA, these functions are important both to the trading
of securities in the OTC marketplace and to the settlement of
transactions involving OTC Securities. FINRA notes that the issuer-
related services it performs are aimed not only at facilitating trading
and settlement, but also at promoting investor protection and market
integrity.
---------------------------------------------------------------------------
\6\ 17 CFR 240.10b-17. Rule 10b-17 requires issuers to give
FINRA, in a timely fashion, information relating to: (1) A dividend
or other distribution in cash or in kind; (2) a stock split or
reverse split; and (3) a rights or other subscription offering.
Under Rule 10b-17, the issuer is required to provide this
information to FINRA no later than 10 days prior to the record date
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 offer relates. Pursuant to Rule 10b-17(b)(3),
comparable notice given by the issuer of an exchange-listed security
in accordance with the procedures of the national securities
exchange upon which a security of such issuer is registered
satisfies this requirement.
\7\ Rule 10b-17 Actions and Other Company-Related Actions
collectively are referred to herein as ``Company-Related Actions.''
FINRA publishes Company-Related Actions pursuant to requests from
issuers and their agents on its Web site in a document known as the
``Daily List.'' Publication of Company-Related Actions in the Daily
List effectively announces the Company-Related Action to the OTC
market.
---------------------------------------------------------------------------
Historically, FINRA has viewed its role in performing issuer-
related functions as primarily ministerial, 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 issuer-related
functions flows primarily from two sources: Rule 10b-17 under the Act
and FINRA's Uniform Practice Code (NASD Rule 11000 Series)
(``UPC'').\8\ Recently, there has been growing concern that FINRA's
Company-Related Action processing services may potentially be used by
certain parties to further fraudulent activities.\9\ Accordingly, in
furtherance of its authority to adopt rules to prevent fraudulent and
manipulative acts and practices, promote just and equitable principles
of trade, and protect investors and the public interest, FINRA proposes
Rule 6490 to clarify the scope of its regulatory authority and to
codify procedures that it will apply when reviewing requests to process
Company-Related Actions. FINRA also proposes to establish fees for its
review and processing of documentation relating to Rule 10b-17 Actions
and Other Company-Related Actions, as well as a fee for appealing FINRA
staff determinations.
---------------------------------------------------------------------------
\8\ The UPC sets forth a basic framework of rules governing
broker-dealers with respect to the settlement of OTC Securities.
\9\ See, e.g., Commission Order of Suspension of Trading In the
Matter of Andros Isle, Corporation, et al., dated March 13, 2008
(File No. 500-1), in which the Commission suspended trading pursuant
to Section 12(k) of the Act, 15 U.S.C. 78l(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) (Commission Charges Five With Dozens of Fraudulent
Corporate Hijackings and Unregistered Offerings of Securities and
Names Two Relief Defendants).
---------------------------------------------------------------------------
III. Description of the Proposal
A. Processing Announcements of Company Related Actions
Rule 6490 would codify the authority of FINRA's Department of
Operations (``Department'') to conduct in-depth reviews of requests to
process Company-Related Actions and to provide FINRA staff the
discretion not to process incomplete requests and requests for which
there are certain indicators of potential fraud. Specifically, the
proposed rule would establish procedures for the submission, review,
and determination of the sufficiency of requests made to FINRA to
process 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 requests to
process Company-Related Actions. The proposed rule would require that
an issuer or other duly authorized representative of the issuer
(``Requesting Party'') submit a request for FINRA to review and process
documentation related to a Rule 10b-17 Action or Other Company-Related
Action within the time frames specified by either Rule 10b-17, in the
event of a Rule 10b-17 Action, or no later than ten calendar days prior
to the effective date of the Company-Related Action in the event of
Other Company-Related Actions. The proposed rule would require all such
requests to be accompanied by proof of payment of a non-refundable fee
specified in the fee table that would be included in Rule 6490, as more
fully described below. In addition, the proposed rule would provide
that initial symbol set up requests may be submitted by FINRA members
or their associated persons in order to comply with regulatory
reporting requirements.
In recognition of FINRA's lack of privity with issuers of OTC
Securities, FINRA is proposing to adopt Supplementary Material .02
(Requests by Third-Parties) to Rule 6490, 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 (``DTC''), foreign exchanges or regulators, or members or
associated persons. FINRA would request that the third party contact
the issuer in question regarding the issuer's obligations under 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 would, in its discretion, be permitted
to review and process a Company-Related Action based on information
from a third party when it believes that such action is necessary for
the protection of investors and the public interest and to maintain
fair and orderly markets, 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 would be deemed ``lapsed''
and then closed. The proposed rule also would provide that if a request
to process a Company-Related Action is deficient, and the Department
determines that it is necessary for the protection of investors and the
public interest and to maintain fair and orderly markets, the
Department may determine
[[Page 39605]]
that documentation related to a Company-Related Action shall not be
processed.
The proposal sets forth five factors that the Department can
consider in determining whether a request to process documentation is
deficient: (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 Commission 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 or
securities laws violations; \10\ (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.
---------------------------------------------------------------------------
\10\ According to FINRA, this factor would include instances
when FINRA has actual knowledge of a Commission Order pursuant to
Section 12(k) of the Act, 15 U.S.C. 78l(k), temporarily suspending
the issuer's securities or pursuant to Section 12(j) of the Act, 15
U.S.C. 78l(j), revoking registration of the issuer's securities.
---------------------------------------------------------------------------
Following a Department determination that a request to process a
Company-Related Action is deficient, the Department would be required
to provide written notice to the Requesting Party. Such written notice
would be required to state the specific factor(s) that caused the
request to be deemed deficient. The proposal permits a Requesting Party
to appeal a deficiency determination to a three-member subcommittee
comprised of current or former industry members of FINRA's UPC
Committee in writing within seven calendar days after service of the
notice. Any written request for an appeal would be required to: (1) Be
accompanied by proof of payment of a non-refundable Action
Determination Appeal Fee; and (2) specifically set forth any and all
defenses to the Department's deficiency determination. Under the
proposal, an appeal would stay the processing of the Company-Related
Action (i.e., the requested Company-Related Action would not be
processed during the period that the Requesting Party requests an
appeal or while any such appeal is pending).
Under the proposal, the subcommittee would convene once each
calendar month to consider all appeals received during the prior month
and would render a determination within three business days following
the day the subcommittee considered the appeal. The subcommittee's
determination would constitute final FINRA action. If a Requesting
Party fails to file a written request for an appeal within seven
calendar days after service of notice, the Department's deficiency
determination would constitute final FINRA action.
B. Fees
FINRA also proposes to establish fees in connection with its review
and processing of Company-Related Actions. The proposed fees would
include late fees for Requesting Parties that fail to provide timely
notice of and requests to process Company-Related Actions. According to
FINRA, the proposed late fees would help encourage issuers of OTC
Securities to meet deadlines, including those associated with Rule 10b-
17, which are critical to enabling FINRA to process such requests in a
timely fashion in order to provide adequate notice to market
participants. Further, FINRA states that the proposed fees would be
beneficial because they would offset some of the significant costs that
FINRA currently bears for the benefit of issuers of OTC Securities that
are not otherwise paying to support the OTC symbol database and the
processing of Company-Related Actions.
Specifically, FINRA proposes to charge the following non-refundable
fees for the review and processing of documentation related to Rule
10b-17 Actions and Other Company-Related Actions:
------------------------------------------------------------------------
Fee
------------------------------------------------------------------------
Rule 10b-17 Action:
Timely Rule 10b-17 Notification.................. $200
Late Rule 10b-17 Notification Submitted at least 1,000
5 calendar days prior to Corporate Action Date..
Late SEA Rule 10b-17 Notification Submitted at 2,000
least 1 calendar day prior to Corporate Action
Date............................................
Late SEA Rule 10b-17 Notification Submitted on or 5,000
after Corporate Action Date.....................
Other Company-Related Action:
Voluntary Symbol Request Change.................. 500
Initial Symbol Set Up............................ (*)
Symbol Deletion.................................. (*)
Appeals:
Action Determination Appeal Fee.................. 4,000
------------------------------------------------------------------------
* No charge.
FINRA also proposes Supplementary Material .01, which would permit
FINRA to process documentation for Company-Related Actions, absent a
determination that the action is deficient, even if the required fee is
not paid. Proposed Supplementary Material .01 provides that unpaid Rule
10b-17 Action fees associated with a specific issuer would be
accumulated, and further, that FINRA would not process Voluntary Symbol
Request Changes until all accumulated fees are paid. According to
FINRA, this accumulation authority would create incentives for issuers
that are not otherwise subject to FINRA's direct jurisdiction to comply
with the proposed rule's requirements without compromising FINRA's
investor protection mission. FINRA states further that acceptance and
processing of untimely Company-Related Action requests and related fees
by FINRA will not act to relieve an issuer of potential violations of
Rule 10b-17 or other Federal or State rules or self-regulatory
organization rules.
In addition, the Voluntary Symbol Request Change Fee would not
apply to mandatory symbol set ups or changes. Specifically, FINRA would
not charge a Voluntary Symbol Request Change Fee in connection with a
mandatory symbol change that results from a Rule 10b-17 Action (i.e., a
mandatory symbol change required because of a CUSIP number change or
otherwise in direct connection with a Rule 10b-17 Action
[[Page 39606]]
would not require the payment of the Voluntary Symbol Request Change
Fee). However, the request (and its granting, subject to symbol
availability) of a specific symbol in connection with a Rule 10b-17
Action would result in assessment of such a fee in addition to the
requisite Rule 10b-17 Action fee.
IV. Discussion and Commission's Findings
The Commission has reviewed carefully the proposed rule change, the
comment letters received, and the FINRA Response Letter and finds that
the proposal is consistent with the Act and the rules and regulations
thereunder applicable to a national securities association, including
the provisions of Section 15A(b)(6) of the Act,\11\ which requires,
among other things, that FINRA rules be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
transactions in securities, and, in general, to protect investors and
the public interest; and Section 15A(b)(5) of the Act,\12\ 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.\13\
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\11\ 15 U.S.C. 78o-3(b)(6).
\12\ 15 U.S.C. 78o-3(b)(5).
\13\ In approving the proposed rule change, the Commission notes
that it has considered the proposed rule's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
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The Commission believes that FINRA's proposal to codify procedures
for the submission, review, and determination of the sufficiency of
requests to process Company-Related Actions will benefit the OTC
marketplace and investors in OTC Securities. The proposal clarifies
FINRA's authority to conduct reviews of requests to process Company-
Related Actions and reserves to FINRA the right to process Rule 10b-17
Actions and Other Company-Related Actions when, notwithstanding the
failure of an issuer to timely submit a notice or pay the applicable
processing fee, such processing is necessary for the protection of
investors and the public interest and to maintain fair and orderly
markets. Accordingly, the Commission believes that the proposal is
designed to encourage issuers and their agents to provide complete,
accurate and timely information to FINRA concerning Company-Related
Actions involving OTC Securities, and thereby to prevent fraudulent and
manipulative acts and practices with respect to these securities.
The Commission notes that the proposal sets forth five factors that
FINRA can look to as a basis for denying a request to process
documentation concerning a Company-Related Action: (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 Commission 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 or securities laws violations; \14\ (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. The Commission also
notes that the proposal includes provisions pursuant to which an
aggrieved party may appeal the denial of a request to process a
Company-Related Action.
---------------------------------------------------------------------------
\14\ See supra note 10.
---------------------------------------------------------------------------
As noted above, the Commission received two comment letters in
response to the proposal.\15\ Both commenters generally supported the
goals of the proposal, but questioned certain aspects of it. One
commenter requested that FINRA provide additional guidance on two of
the factors FINRA would consider when determining whether a request to
process documentation related to a Company-Related Action is deficient,
namely, whether an issuer is not current in its reporting obligations,
if applicable, to the Commission or other regulatory authority, and
whether there is significant uncertainty in the clearance and
settlement process.\16\ Specifically, this commenter inquired whether
delinquent issuers would automatically have their requests to process a
Company-Related Action determined to be deficient, and also whether
issuers that are not designated as eligible for the DTC's FAST systems
would have their requests viewed as raising significant uncertainty in
the clearance and settlement process.\17\
---------------------------------------------------------------------------
\15\ See Pink OTC Letter and Nelson Law Firm Letter, supra note
4.
\16\ See Pink OTC Letter.
\17\ Id.
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In response to this commenter, FINRA explained that when the
Department reasonably believes that an issuer submitting a request to
process documentation related to a Company-Related Action has triggered
one of the explicitly enumerated factors, the Department would
generally conduct an in-depth review of the Company-Related Action and
seek additional information or documentation from the issuer.\18\ FINRA
noted that it would have the discretion not to process any such actions
that are incomplete or when it determines that not processing such an
action is necessary for the protection of investors and the public
interest and to maintain fair and orderly markets.\19\ FINRA stated
that the failure of an issuer to remain current it its reporting
obligations is one of five factors that FINRA ``may'' consider in
making a deficiency determination.\20\ FINRA further noted that the
proposal does not mandate any particular mechanism of clearance and
settlement for an issuer's securities, including FAST designation by
DTC.\21\
---------------------------------------------------------------------------
\18\ See FINRA Response Letter, supra note 5 at 3-4.
\19\ Id.
\20\ Id.
\21\ Id.
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The Commission believes that the proposed factors are reasonably
designed to allow FINRA to deny a request to process a Company-Related
Action based on the above-noted objective criteria. As FINRA pointed
out, if FINRA believes that one of the enumerated factors has been
triggered, FINRA staff would conduct an in depth review and follow up
with the issuer to seek additional information or documentation. The
Commission believes that the proposal furthers FINRA's goal to assure
that documents supporting a request to process a Company-Related Action
are complete and correct and that its facilities are not misused in
furtherance of fraudulent or manipulative acts and practices. At the
same time, the proposal recognizes the interests of a Requesting Party
in receiving fair consideration from FINRA in connection with a request
to process a Company-Related Action and in having a fair process for an
appeal in the event a request to process a Company-Related Action is
denied. The Commission therefore finds the proposal to be consistent
with Section 15A(b)(6) of the Act.\22\ The Commission
[[Page 39607]]
notes that FINRA's administration of its proposed rule is subject to
continuing Commission oversight, and that FINRA, as a registered
national securities association, remains bound by its obligations as a
self-regulatory organization under the Act and all relevant rules and
regulations thereunder.
---------------------------------------------------------------------------
\22\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
Two commenters questioned the effects of the proposed fees.\23\
Specifically, one commenter expressed concern that the proposal would
permit FINRA to decline to set an ex-dividend date for distributions of
``Liquidating OTC Securities'' if an issuer failed to timely notify
FINRA of an upcoming distribution, as required by Rule 10b-17, and pay
the required processing fee.\24\ According to this commenter, a failure
by FINRA to set an ex-dividend date for these securities would ``burden
transactions in Liquidating OTC Securities with wholly unnecessary
risks and transaction costs'' and potentially permit FINRA to ``escape
from its responsibilities under Section 15A'' of the Act when the
required fee is not paid.\25\
---------------------------------------------------------------------------
\23\ See Pink OTC Letter and Nelson Law Firm Letter, supra note
4.
\24\ See Nelson Law Firm Letter. This commenter defines
``Liquidating OTC Securities'' as securities whose issuers are
``bankrupt, in liquidation, or involved in various forms of
reorganization.''
\25\ Id.
---------------------------------------------------------------------------
In response to this concern, FINRA clarified that the proposal
expressly permits FINRA to set ex-dividend dates, as well as process
other Company-Related Actions, in certain circumstances even if FINRA
fails to receive the required notice and accompanying fee from the
issuer. In particular, FINRA noted that the text of proposed
Supplementary Material .01 (SEA Rule 10b-17 Fee Accumulations) states
that ``notwithstanding the timeliness of the SEA Rule 10b-17 Action
submission or the failure to pay applicable fees, FINRA will make its
best efforts to process documentation related to SEA Rule 10b-17
Actions that are not otherwise deemed incomplete or otherwise deficient
by FINRA because of the critical nature of this information to the
marketplace.'' \26\ Similarly, FINRA noted that the rule text of
proposed Supplementary Material .02 (Requests by Third-Parties)
provides that when FINRA is unable to obtain notification from an
issuer, it may in its discretion review and process a Rule 10b-17
Action or Other Company-Related Action based on information from a
third-party, such as DTC, foreign exchanges or regulators, or members
or associated persons, when it believes such action is necessary under
its statutory obligations.\27\
---------------------------------------------------------------------------
\26\ See FINRA Response Letter, supra note 5 at 2-3.
\27\ Id.
---------------------------------------------------------------------------
One commenter noted that issuers of OTC Liquidating Securities may
believe that they are not obligated to provide a Rule 10b-17 notice to
FINRA, particularly, if, for example a bankruptcy trustee views its
obligations to maximize the value of the issuer's estate to be in
conflict with payment of processing fees to FINRA.\28\ In response to
this comment, FINRA remarked that an issuer that files for bankruptcy,
or a trustee acting on its behalf, faces numerous fees and charges in
an effort to discharge the issuer's obligations and stated that it saw
no reason why its proposed fees should not apply to these issuers.\29\
---------------------------------------------------------------------------
\28\ See Nelson Law Firm Letter supra note 4 at 3.
\29\ See FINRA Response Letter, supra note 5 at 2.
---------------------------------------------------------------------------
The other commenter questioned whether the proposed fees for
providing Company-Related Action processing services might cause
issuers to effect corporate actions without notifying FINRA.\30\ In
response to this point, FINRA noted that an issuer that fails to notify
FINRA of a proposed corporate action, as required by Rule 10b-17 is
potentially violating an anti-fraud rule of the Federal securities laws
and stated that where it has actual knowledge of issuer non-compliance
with Rule 10b-17, FINRA will use its best efforts to notify the
Commission.\31\ According to FINRA, non-compliance with Rule 10b-17 has
been an ongoing concern, and it suggested that heightened awareness of
Rule 10b-17 that could result from adoption of the proposal, graduated
fees for delayed compliance with Rule 10b-17, and the potential for
referral to the Commission for non-compliance may lead issuers to
proceed more cautiously in this area.\32\
---------------------------------------------------------------------------
\30\ See Pink OTC Letter, supra note 4 at 2.
\31\ See FINRA Response Letter, supra note 5 at 5.
\32\ See id at 6. FINRA also stated that if its proposal is
approved, it (i) will notify issuers of the proposed rule and fees
by issuing a Regulatory Notice, sending out alerts through
electronic platforms used by market participants, and posting this
information on its dedicated Web page for OTC Actions; (ii) will
reach out to industry groups involved in issuer corporate actions to
notify parties that will be impacted by the proposal; and (iii)
expects the percentage of late notifications will decline over time.
---------------------------------------------------------------------------
The Commission finds that FINRA's proposed fees to review requests
to process Company-Related Actions are consistent with the Act. The
Commission believes that the proposed fees are reasonable because they
are intended to offset some of the significant costs FINRA currently
incurs in processing Company-Related Actions and that they are
equitably allocated because they apply to any Requesting Party that
submits a request to process a Company-Related Action (other than those
enumerated actions for which no fees would be charged). The Commission
believes that FINRA has adequately responded to commenters' concerns
about the impact of the proposed fees.
Finally, one commenter offered suggestions relating to the
operation of the proposed rule.\33\ In response to the comment that
FINRA should limit intra-day processing of Company-Related Actions to
emergency situations such as security revocations and quotation and
trading halts, FINRA explained that, with the exception of security
revocations, quotation and trading halts, and cancellation of
securities pursuant to an effective bankruptcy court order, its general
policy is to announce actions on the Daily List published on OTCBB.com
with a future effective date, but that in some cases, often because of
failure to receive timely notification, setting a future effective date
is not possible.\34\ This commenter also suggested that FINRA
coordinate processing of Company-Related Actions across FINRA
departments and ensure information regarding Company-Related Actions is
disseminated accurately and consistently on the Daily List on the
OTCBB.com and NasdaqTrader Web sites.\35\ In response to these
comments, FINRA noted that, although FINRA departments work closely in
this regard, not all systems and platforms used by market participants
to access such data are controlled by FINRA, and there could be a lag
in the dissemination of certain information.\36\ FINRA also noted that
because the NasdaqTrader Web site simply provides a hyperlink to the
OTCBB.com Daily List, there should be no inconsistencies in information
on these two Web sites.\37\ The Commission believes that FINRA has
adequately responded to the commenters' suggestions relating to the
operation of the proposed rule.
---------------------------------------------------------------------------
\33\ See Pink OTC Letter, supra note 4.
\34\ See FINRA Response Letter, supra note 5.
\35\ See Pink OTC Letter, supra note 4.
\36\ See FINRA Response Letter, supra note 5.
\37\ Id.
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (SR-FINRA-2009-89), be, and it hereby is,
approved.
[[Page 39608]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\38\
Elizabeth M. Murphy,
Secretary.
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\38\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2010-16687 Filed 7-8-10; 8:45 am]
BILLING CODE 8010-01-P
