Category: FINRA

FINRA: In December, 2015, FINRA proposed rules for a whole new category of broker-dealer, called “Capital Acquisition Brokers” (“CABs”), which limit their business to corporate financing transactions. In February 2014 FINRA sought comment on the proposal, which at the time referred to a CAB as a limited corporate financing broker (LCFB). Following many comments that the LCFB rules did not have a significant impact on the regulatory burden for full member firms, the new rules modify the original LCFB proposal in more than just name. The new rules will take effect upon approval by the SEC and are currently open to public comments…

Mar152016

House Passes More Securities Legislation

ABA Journal’s 10th Annual Blawg 100

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In what must be the most active period of securities legislation in recent history, the US House of Representatives has passed three more bills that would make changes to the federal securities laws. The three bills, which have not been passed into law as of yet, come in the wake of the Fixing American’s Surface Transportation Act (the “FAST Act”), which was signed into law on December 4, 2015.

The 3 bills include: (i) H.R. 1675 – the Capital Markets Improvement Act of 2016, which has 5 smaller acts imbedded therein; (ii) H.R. 3784, establishing the Advocate for Small Business Capital Formation and Small Business Capital Formation Advisory Committee within the SEC; and (iii) H.R. 2187, proposing an amendment to the definition of accredited investor. None of the bills have been passed by the Senate as of yet.

Meanwhile, the SEC continues to finalize rulemaking under both the JOBS Act, which

Jan262016

FINRA Proposes New Category Of Broker-Dealer For “Capital Acquisition Brokers”

ABA Journal’s 10th Annual Blawg 100

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In December, 2015, FINRA proposed rules for a whole new category of broker-dealer, called “Capital Acquisition Brokers” (“CABs”), which limit their business to corporate financing transactions. In February 2014 FINRA sought comment on the proposal, which at the time referred to a CAB as a limited corporate financing broker (LCFB). Following many comments that the LCFB rules did not have a significant impact on the regulatory burden for full member firms, the new rules modify the original LCFB proposal in more than just name. The new rules will take effect upon approval by the SEC and are currently open to public comments.

A CAB will generally be a broker-dealer that engages in M&A transactions, raising funds through private placements and evaluating strategic alternatives and that collects transaction based compensation for such activities. A CAB will not handle customer funds or securities, manage customer accounts or engage in market making or proprietary trading.

As

Nov242015

SEC Advisory Committee Recommendations Related To Finders

ABA Journal’s 10th Annual Blawg 100

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On September 23, 2015, the SEC Advisory Committee on Small and Emerging Companies (the “Advisory Committee”) met and finalized its recommendation to the SEC regarding the regulation of finders and other intermediaries in small business capital formation transactions. This is a topic I have written about often, including a recent comprehensive blog which can be read HERE.

By way of reminder, the Committee was organized by the SEC to provide advice on SEC rules, regulations and policies regarding “its mission of protecting investors, maintaining fair, orderly and efficient markets and facilitating capital formation” as related to “(i) capital raising by emerging privately held small businesses and publicly traded companies with less than $250 million in public market capitalization; (ii) trading in the securities of such businesses and companies; and (iii) public reporting and corporate governance requirements to which such businesses and companies are subject.”

The Advisory Committee made four recommendations related

Jun302015

Going Public Transactions For Smaller Companies: Direct Public Offering And Reverse Merger

ABA Journal’s 10th Annual Blawg 100

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Introduction

One of the largest areas of my firms practice involves going public transactions.  I have written extensively on the various going public methods, including IPO/DPOs and reverse mergers.  The topic never loses relevancy, and those considering a transaction always ask about the differences between, and advantages and disadvantages of, both reverse mergers and direct and initial public offerings.  This blog is an updated new edition of past articles on the topic.

Over the past decade the small-cap reverse merger, initial public offering (IPO) and direct public offering (DPO) markets diminished greatly.  The decline was a result of both regulatory changes and economic changes.  In particular, briefly, those reasons were:  (1) the recent Great Recession; (2) backlash from a series of fraud allegations, SEC enforcement actions, and trading suspensions of Chinese companies following reverse mergers; (3) the 2008 Rule 144 amendments, including the prohibition of use of the rule for shell company

Jun162015

SEC Has Approved A Two-Year Tick Size Pilot Program For Smaller Public Companies

ABA Journal’s 10th Annual Blawg 100

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On May 6, 2015 the SEC approved a two-year pilot program with FINRA and the national securities exchanges that will widen the minimum quoting and trading increments, commonly referred to as tick sizes, for the stocks of smaller public companies.  The goal of the program is to study whether wider tick sizes improve the market quality and trading of these stocks. 

The basic premise is that if a tick size is wider, the spread will be bigger, and thus market makers and underwriters will have the ability to earn a larger profit on trading.  If market makers and underwriters can earn larger profits on trading, they will have incentive to make markets, support liquidity and issue research on smaller public companies.  The other side of the coin is that larger spreads and more profit for the traders equates to increased costs to the investors whose accounts are being traded. 

The tick size program

May122015

SEC Proposes Broadening Of Broker-Dealer Registration Rules To Include Proprietary And High-Frequency Traders

ABA Journal’s 10th Annual Blawg 100

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On March 25, 2015, the SEC proposed rule amendments to require high-frequency and off-exchange traders to become members of FINRA.  The amendments would increase regulatory oversight over these traders.

Over the years many active cross-market proprietary trading firms have emerged, many of which engage in high-frequency trading.  These firms generally rely on the broad proprietary trading exemption in rule 15b9-1 to forgo membership with, and therefore regulatory oversight by, FINRA.  The rule change is specifically designed to require these high-frequency traders to become members of FINRA and submit to its review and oversight. 

The proposed rule change amends Rule 15b9-1 of the Securities Exchange Act of 1934, as amended (“Exchange Act”) to narrow a current exemption from FINRA membership if the broker is a member of a national securities exchange, carries no customer accounts and has annual gross income of no more than $1,000 derived from sources other than the exchange to

Mar242015

The New FINRA Broker Background Check Rule

ABA Journal’s 10th Annual Blawg 100

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On December 30, 2014, the SEC approved FINRA Rule 3110(e), which requires FINRA member firms to verify the information provided by or contained in a broker’s Form U-4 within 30 days of filing the form with FINRA.  The Rule becomes effective on July 31, 2015.  The Rule is intended to help verify background information on a broker, including publicly available information through the FINRA Broker-Check system and to prevent high-risk, recidivist brokers from moving from firm to firm and continuing questionable or outright improper conduct. 

Background

One of FINRA’s 2015 Regulatory and Examination Priorities is addressing concerns about high-risk brokers and improving background checks and due diligence by member firms on prospective hires.  The new Rule is part of FINRA’s initiative in this regard.  FINRA is taking additional steps in this area as well, including a one-time background and financial check of all registered representatives, which checks will be completed by August 2015.

Mar102015

SEC Supports FINRA’s Rule 6490 Authority Over Corporate Actions

ABA Journal’s 10th Annual Blawg 100

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In two recent administrative decisions, the SEC has upheld FINRA’s broad authority under Rule 6490 to approve and effectuate corporate actions by public companies trading on the OTC Markets.  One of FINRA’s mandates is to protect investors and maintain fair and orderly markets and like broker-dealers, it acts as a gatekeeper in the small-cap industry.  FINRA exercises its powers though the direct regulation of its member broker-dealer firms, but also through its Office of Fraud Detection and Market Intelligence, which monitors the trading activity and press releases of issues in the marketplace and conducts related investigations.  FINRA works with the SEC as a front line in the detection, investigation and assistance with the prosecution of issuers. 

Recently, through its power under Rule 6490, as more fully explained below, FINRA has, with the support of the SEC, expanded its impact on the small-cap marketplace by conducting in-depth reviews of issuers in conjunction with the

Oct282014

FINRA Seeks to Eliminate the OTCBB and Impose Regulations on the OTC Markets

ABA Journal’s 10th Annual Blawg 100

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On October 7, 2014, the SEC published a release instituting proceedings to determine whether to approve FINRA’s request to delete the rules related to, and the operations of, the OTC Bulletin Board quotation service.  On June 27, 2014, FINRA quietly filed a proposed rule change with the SEC seeking to adopt rules relating to the quotation requirements for OTC equity services and to delete the rules relating to the OTCBB and thus cease its operations.  Although the rule filing was published in the Federal Register, it garnered no attention in the small cap marketplace.  Only one comment letter, from OTC Market Group, Inc. (“OTC Markets”) (i.e., the entity that owns and operates the inter-dealer quotation system known by its OTC Pink, OTCQB and OTCQX quotation tiers) was submitted in response to the filing.

The OTCBB has become increasingly irrelevant in the OTC marketplace for years.  In October 2010, I wrote a blog titled

Sep302014

The ECOS Matter; When Is A Reverse Split Effective?

ABA Journal’s 10th Annual Blawg 100

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In what was presumably an unintended consequence, the application of an SEC- approved FINRA regulation has resulted in a conflict between state and federal corporate law for a small publicly traded company.

On September 16, 2014, Ecolocap Solutions, Inc. (“ECOS”) filed a Form 8-K in which it disclosed that FINRA had refused to process its 1-for-2,000 reverse split.  At the time of the FINRA refusal, ECOS had already received board and shareholder approval and had filed the necessary amended articles with the State of Nevada, legally effectuating the reverse split in accordance with state law.  Moreover, ECOS is subject to the reporting requirements under the Securities Exchange Act of 1934, as amended (“Exchange Act”), and had filed a preliminary and then definitive 14C information statement with the SEC, reporting the shareholder approval of the split.

The ECOS 8-K attached a copy of the FINRA denial letter, which can be viewed HERE