In a pair of recent opinions, the Securities and Exchange Commission (SEC) found that FINRA acted within the scope of its rules and governing statutory scheme in refusing to announce corporate actions for companies whose executives were subjects of regulatory actions alleging securities laws violations.
FINRA is a self-regulatory organization (SRO) responsible for regulating the market for securities. It owns and operates the OTC Bulletin Board (OTCBB), an electronic inter-dealer quotation system that FINRA provides to its members for securities not listed on a national securities exchange, such as NASDAQ and NYSE. FINRA provides various services for companies whose securities are listed on the OTCBB, such as processing requests to announce and effectuate certain corporate actions, including mergers, dividends, splits, and name and domicile changes.
In 2010, based on concerns that FINRA’s corporate action announcement processing services could potentially be used by companies to perpetrate stock fraud and other securities laws violations, FINRA proposed, and the SEC approved, FINRA Rule 6490. This rule permits FINRA to deny an issuer’s request that FINRA announce a corporate action under certain circumstances. Specifically, FINRA Rule 6490(d)(3) states that where a company-related action is deemed deficient (i.e., FINRA has actual knowledge that officers or directors connected to the company are the subject of an adjudicated or settled regulatory action related to fraud or other securities laws violations), FINRA may determine not to process the corporate action if refusing to do so promotes the protection of investors, the public interest and the maintenance of fair and orderly securities markets.