FINRA has & could say NO!! FINRA Uses Rule 6490 To Stop Wash, Rinse, Repeat Issuers Financial Industry Regulatory Authority (“FINRA”) proposed changes to its Rule 6490. Until that time, the Rule had provided merely that the agency review and process certain corporate actions taken by companies not listed on exchanges, companies known to most as OTC securities. The changes imposed by Rule 6490, which became effective in 2010, gave FINRA more clout: it can now deny corporate actions in certain specific circumstances including reverse mergers.
Rule 6490 codifies Rule 10b-17 of the Securities Exchange Act of 1934 (“Exchange Act”). The corporate actions in question include name changes, forward stock splits, reverse stock splits, distributions of cash or securities such as dividends, and rights and subscription offerings. Recently, FINRA has begun to use the Rule has as an enforcement tool to deny corporate actions by penny stock issuers accepting capital from known toxic funders. The blacklisted toxic funders have been the subject of recent SEC enforcement actions and Department of Justice Investigations; it is these legal actions that permit FINRA to deny the request from companies that have not themselves been targeted.
FINRA’s refusal to process certain corporate changes for issuers accepting toxic funding will likely cause a review by the Depository Trust Company (“DTC”) of stock issuances made by the companies whose requests are denied, resulting in a global lock or DTC chill. Lather, Rinse, Repeat issuers are not new to the penny stock markets. The behavior is most likely to occur when dormant issuers have been taken over in corporate hijackings. The 2010 amendments to Rule 6490 were in fact prompted by an SEC investigation of, and litigation against, Canadian Irwin Boock and his associates, who hijacked dozens of dormant public shells with the help of the fraudulent transfer agency they created. A common pattern in these issuers is to issue issue millions—sometimes billions—of shares of unregistered and illegally free trading stock until reaching their authorized capital. Once they hit the limit, they seek to enact aggressive reverse splits to reduce their outstanding shares so that they can repeat the scheme.
FINRA Review Of Corporate Actions
Rule 6490 requires issuers to complete and file a document with FINRA at least 10 business days prior to the record date of the intended 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’s submissions and cause the issuer to delay the announcement of its corporate action. This is particularly problematic for reverse merger companies that may not have all documents requested by FINRA.
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