• 07Oct

    Potential Impact of Rule SEC Release #34-60515 Regarding Proposal to Extend Regulation NMS Coverage to OTC Securities

    Securities Law Firm No Comments

    FINRA, in August of 2009, filed Release No. 34-60515 with the SEC. FINRA proposes to extend certain NMS protections to quoting and trading in the OTC market for equity securities.

    In summary:

    1. Restrictions on sub-penny quoting;
    2. Prohibitions on locked or crossed markets;
    3. Implementation of caps on access fees;
    4. Requirements of transparency of customer limit orders.

    FINRA’s goals, part of broadly anticipated changes in financial systems, are proposed as part of efforts to both modernize and achieve higher “quality” in the OTC marketplace.

    1. Sub-Penny Quote Restrictions

    FINRA addresses both issues of modernization and higher quality by proposing to restrict sub-penny quoting in conjunction with removing the requirement that ATS’s include non-subscriber access fees within its quote. Restricting sub-penny quoting may help prevent the practice of “stepping ahead” of displayed limit orders by trivial amounts.

    The proposal will most effect small businesses whose securities trade for under $1.00. Under FINRA’s proposal, market participants will be able to quote in increments ranging from pennies to ten thousandths of a penny depending on the price of the security. There is some doubt as to the appropriateness of this level, however, for MPVs under $1.00.

    2. Locked & Crossed-Markets Restrictions

    FINRA’s proposal requires members to implement policies and procedures to avoid locking and crossing quotations and to enable the reconciliation of locked or crossed quotations. Displaying locked quotations is inconsistent with the maintenance of fair and orderly markets and prevents market efficiency. FINRA’s proposal aims to enhance investor protections, allowing member firms to immediately post a routed order to full-display size.

    3. Capping Access Fees

    Current rules limit most alternative trading systems (“ATS”) from charging either access or post-transaction fee to non-subscribers, unless that fee is already included in the ATS’s posted quote. FINRA would improve application of the Interpositioning Rule’ by reflecting access fees. Thus, posted quotes may foster more accurate competitive price quotes, by emphasizing an order-driven market, to encourage ECN competition.

    4. Require Immediate Customer Limit Order Displays

    Will the new rules competition, provide increased liquidity, and increase transparency? That is FINRA’s hope. Under the proposal, a market maker displaying a priced quote must immediately display customer limit orders that better market displayed price and size. Requirements of displaying customer limit orders may increase quote competition and ultimately narrow spreads. The FINRA goal here, as with most of FINRA’s proposed changes, is squarely aimed at reducing transactional costs.

    Attorney Laura Anthony is a Florida securities attorney and the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The Florida corporate and securities attorneys of Legal & Compliance offer specialized legal services to small and mid-size private and public (OTCBB) companies, entrepreneurs, and business professionals throughout the country. Contact us today for a FREE consultation!

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  • 06Oct

    Examination of Rule 144 and Potential Interpretations

    Securities Attorneys No Comments

    The SEC revised Rule 144, effective February 15, 2008. Section 144 rules are used to ascertain if a company falls into an exemption from registration, because of non-underwriter status. But if securities, or the transaction, are registered as required, 144 doesn’t apply. The revisions aimed to reduce previous limits on resale of restricted securities by reporting companies. Unfortunately, a certain amount of ambiguity has also crept in.

    The Rule had clearly required a one-year holding period. But included in the new Rule 144(i) is the following: (paraphrased) “if a company has ever been a shell company[1], past or present, then the company must be current on its periodic SEC filings for twelve months following the time it ceases to be a shell, before 144 is available.”

    For non-affiliates of non-reporting companies, the one year holding period requirement remains.

    Rule 144 thus allows non-affiliates of a reporting company to resell restricted securities after a six-month holding period, without volume limitations or manner-of-sale limitations.

    If non-affiliates have held the stock for two years or more, however, they would be allowed to sell under the prior rule without volume limits or manner of sale requirements. For affiliates wanting to qualify as a “reporting” company, the securities issuer must have been subject to reporting requirements of §§13 or 15(d) of the Securities Act of 1934 for at least the ninety days prior to sale.

    Rule 144 is also retroactive. This rule even applies to companies as seminal as NYSE or Berkshire. Notably, companies that are late with their filings but do manage to ‘catch up’ to become current may still attempt to use 144.

    Conclusions: The New Rule 144

    No matter how clear the revised 144 SEC regulations may eventually become, there are also competing security rules and case laws about when it is possible to “tack” the current holding period onto the previous owner’s time of holding the securities.

    Rule 144 is used only for public, not private, sales. If the owner of a controlling block of stock in a public company negotiates a private sale of an entire block with a buyer, the Rule doesn’t apply.

    Finally, Rule 144 remains technically a “safe harbor,” so that under some circumstances, re-sales may be exempt from registration even though they do not comply with the requirements of the Rule.

    Attorney Laura Anthony is a Florida securities attorney and the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The Florida corporate and securities attorneys of Legal & Compliance offer specialized legal services to small and mid-size private and public (OTCBB) companies, entrepreneurs, and business professionals throughout the country. Contact us today for a FREE consultation!

    [1] The SEC defines a shell company as “with no or nominal operations and either no or nominal assets, assets consisting solely of cash and cash equivalents, or assets consisting of any amount of cash and cash equivalents and nominal other assets.”

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