FINRA Rule, 6490, recently enacted in September 2010, requires issuers of equities and debt securities not listed on exchanges to provide timely notice to FINRA of certain corporate actions. These corporate actions include name changes, forward stock splits, reverse stock splits, distributions of cash or securities such as dividends, stock splits and other actions, and rights and subscription offerings. The new rule codifies rule 10b-17 of the Securities Exchange Act. The new rule will impact both SEC reporting and non-reporting issuers if they enact corporate changes including issuers who go public direct and conduct underwritten or direct public offerings and those who pursue reverse mergers with public shells. Complying with this criteria is often an unexpected legal and compliance cost for many issuers not familiar with the rule. Failure to comply could lead to suspension of services from Depository Trust Company (“DTC”) resulting in a global lock or DTC chill.
Rule 6490 requires issuers to complete and file a document with FINRA at least 10 business days prior to the record date of the corporate action. FINRA approval must be received prior to the corporate action becoming effective. In addition, FINRA may request additional documents, conduct detailed and selective reviews of the issuer submissions and cause the issuer to delay the announcement of its corporate action.
A FINRA review will be triggered if any of the five factors set forth in Rule 6490 are thought to be present:
• FINRA believes the forms are incomplete, inaccurate or filed without the appropriate corporate authority;
• The issuer is not current in its reporting obligations with the Securities and Exchange Commission;
• Persons involved in or related to the corporate action are the subject of pending or settled regulatory action or are under investigation by a regulatory body or are the subject of a pending criminal action related to fraud or securities law violations;
• Persons related to the corporate action are likely involved in fraudulent activities involving securities or may pose a threat to investors;
• There is significant uncertainty in the settlement and clearance process for the issuer’s securities.
Issuers will be charged fines for failure to comply with the rules. Some of these fines include:
• Timely Rule 10b-17 Notification 10 business days before the Action – filing fee $200
• Late filing, but filing at least 5 calendar days before the Action – $1,000
• Late filing, but filing at least 1 business day before the Action – $2,000
• Filing on or after the Action date – $5,000.
After FINRA clearance of corporate actions under Rule 6490, issuers should expect a full review by Depository Trust Company (“DTC”) and to provide an opinion from their SEC lawyer as to the tradability of shares held in CEDE & Co. It is during this review that many reverse merger issuers find themselves losing DTC eligibility and subject to the DTC Chill list.