FINRA Provides Guidance on Amendments to FINRA Rules Relating to SEC Regulation M

Regulation M

Executive Summary

FINRA is issuing this Notice to provide additional information and guidance on the new FINRA Rules governing notification requirements and marketplace-specific rules relating to Regulation M under the Securities Exchange Act of 1934.¹ As announced in Regulatory Notice 08-57, the FINRA Rules become effective December 15, 2008.

The text of the amendments is set forth in Attachment A of this Notice. The forms firms must use to notify FINRA under the amendments are provided in Attachment B of this Notice and are available (along with any updates) online at www.finra.org/RegM.

Questions regarding this Notice may be directed to:

Background and Discussion

On September 11, 2008, the SEC approved a proposed rule change that, among other things: (1) adopts new FINRA Rule 5190, which includes the Regulation M-related notification requirements applicable to firms participating in securities offerings; (2) adopts new FINRA Rule 6470, which includes certain Regulation M-related requirements that are currently in the OTC Bulletin Board (OTCBB) rules and applies to all OTC Equity Securities;² and (3) makes conforming amendments to the Regulation M-related rules applicable to the Alternative Display Facility (ADF).³

Regulation M is designed to prevent manipulation by persons with an interest in the outcome of an offering and prohibits activities and conduct that could artificially influence the market for an offered security.⁴ In this regard, Regulation M generally prohibits underwriters, broker-dealers, issuers and other persons participating in a distribution from directly or indirectly bidding for or purchasing the offered security (or inducing another person to do so) during the applicable "restricted period." The restricted period commences on the later of either one or five business days prior to the determination of the offering price or such time that a person becomes a distribution participant, and ends upon such person's completion of participation in the distribution.⁵ For purposes of determining when the applicable restricted period under Regulation M commences, or whether no restricted period applies because the "actively traded" exception can be relied upon, the SEC has adopted a dual standard of the value of the worldwide average daily trading volume (ADTV) of the offered security and public float value of the issuer.⁶

Regulation M also governs certain market activities (i.e., stabilizing bids, syndicate covering transactions and penalty bids)⁷ in connection with an offering and requires that notification of such activity be provided to the relevant self-regulatory organization or, in the case of stabilizing bids, the market where the stabilizing bid is to be posted. Finally, Regulation M prohibits any person from selling short a security that is the subject of a public offering and purchasing the security in the offering, if such short sale was effected during the restricted period (which, for purposes of the short sale restrictions, generally is the five-day period prior to pricing).⁸

Firms are reminded that certain rules under Regulation M apply to some, but not all, offerings, e.g., SEC Rule 101 applies only to "distributions." A distribution under Regulation M is distinguished from ordinary trading transactions by the "magnitude of the offering" and the presence of "special selling efforts and selling methods."⁹ The types of offerings that can satisfy the definition of "distribution" under Regulation M include public offerings, private placements, shelf offerings, mergers and other acquisitions, exchange offers and at-the-market offerings.¹⁰ In addition, certain activities are excepted from the rules under Regulation M. For example, transactions in Rule 144A securities during a distribution of such securities are not prohibited under SEC Rule 101, subject to certain conditions set forth in the rule.¹¹

As part of FINRA's program to monitor for compliance with Regulation M, FINRA's Market Regulation Department reviews over-the-counter (OTC) trading and quoting activity for prohibited purchases, bids or attempts to induce bids or purchases during the applicable restricted period and for prohibited short sales during the five-day period prior to the pricing of an offering. Pursuant to its rules, FINRA must receive pertinent distribution-related information in a timely fashion to facilitate this component of its Regulation M compliance program.¹²

The guidance in this Notice relates only to firms' Regulation M-related notification obligations under FINRA rules and does not address other obligations that may apply, e.g., the FINRA transaction reporting rules or the Regulation M-related rules of a national securities exchange.

New FINRA Rule 5190

New FINRA Rule 5190 (Notification Requirements for Offering Participants) consolidates some of the Regulation M-related notification requirements that currently are found in NASD Rule 2710 and Incorporated NYSE Rule 392 (Notification Requirements for Offerings of Listed Securities). Unlike FINRA's current rules, the new rule applies uniformly to distributions of listed and unlisted securities.

Requirements applicable to distributions subject to a restricted period (Rule 5190(c)(1))

Rule 5190(c)(1) sets forth the notification requirements applicable to distributions of listed and unlisted securities that are "covered securities"¹³ subject to a restricted period under Rule 101 or 102 of Regulation M.

Specifically, firms must determine, in accordance with Regulation M, whether the applicable restricted period commences one day or five days prior to pricing (a "one-day" or "five-day" restricted period), and notify FINRA in writing of the firm's determination and the basis for such determination.¹⁴ Additionally, firms are required to include in the written notification the contemplated date and time of commencement of the restricted period,¹⁵ and identify the distribution participants and affiliated purchasers.¹⁶ Under the new rule, firms are not required to submit a copy of the registration statement or other offering documents to FINRA's Market Regulation Department.

While the new rule places the responsibility of determining the applicable restricted period on the firm, as a practical matter, FINRA will accept a firm's notification that the five-day restricted period applies to a prospective distribution without providing the basis for that determination. If, on the other hand, a firm asserts that a one-day or no restricted period applies to a particular distribution, FINRA will require that the firm demonstrate the basis for that determination. (As discussed below, firms must notify FINRA that the "actively traded securities" exception applies, and hence there is no restricted period, under new Rule 5190(d).)¹⁷

Firms must provide notification no later than the business day prior to the first complete trading session of the applicable restricted period, unless later notification is necessary under specific circumstances.¹⁸ Where the principal market closes early (e.g., for a holiday), the shortened session would constitute a complete trading session for purposes of the rule.

In addition, firms must notify FINRA upon pricing a distribution that is subject to a restricted period under Regulation M.¹⁹ The notification must include the following pricing-related information:

Firms also are required to identify the distribution participants and affiliated purchasers.

Firms must submit the notification no later than the close of business the next business day following the pricing of the distribution, unless later notification is necessary under specific circumstances.²² This requirement ensures that FINRA gets timely pricing information in instances where a distribution does not terminate for weeks or even months after pricing, as might be the case, for example, in a shelf offering.

Finally, firms must notify FINRA in writing if they cancel or postpone any distribution for which prior notice of commencement of the restricted period has been provided to FINRA.²³ Firms must provide such notification immediately upon the cancellation or postponement of the distribution.

Requirements applicable to issuers or selling security holders subject to a restricted period (Rule 5190(c)(2))

Rule 5190(c)(2) requires that any firm that is an issuer or selling security holder in a distribution of a security, including an "actively traded" security, subject to a restricted period under Rule 102 of Regulation M comply with the notification requirements of Rule 5190(c)(1), discussed above. This requirement ensures that FINRA is notified of any distribution in which a firm is participating as an issuer or selling security holder, to the extent that notice of such distribution has not already been provided under Rule 5190.

Requirements applicable to distributions of "actively traded" securities (Rule 5190(d))

Rule 5190(d) sets forth the notification requirements applicable to distributions of listed and unlisted securities that are considered "actively traded" securities and thus are not subject to a restricted period under Rule 101 of Regulation M.²⁴

In connection with such distributions, firms must notify FINRA in writing of the firm's determination that no restricted period applies and the basis for such determination.²⁵ Firms must notify FINRA at least one business day prior to the pricing of the distribution, unless later notification is necessary under specific circumstances.²⁶

Upon pricing a distribution of a security that is considered "actively traded," firms must provide written notification to FINRA, including the pricing-related information required under Rule 5190(c)(1)(B), discussed above, and identify the distribution participants and affiliated purchasers.²⁷ Firms must notify FINRA no later than the close of business the next business day following the pricing of the distribution, unless later notification is necessary under specific circumstances.²⁸

Penalty bids and syndicate covering transactions in OTC Equity Securities (Rule 5190(e))

Rule 5190(e) requires firms to notify FINRA of penalty bids or syndicate covering transactions in connection with an offering of an OTC Equity Security. Firms must notify FINRA of their intention to conduct such activity prior to imposing the penalty bid or engaging in the first syndicate covering transaction, and identify the security and its symbol and the date such activity will occur. In addition, firms are required to subsequently confirm such activity within one business day of completion, and identify the security and its symbol, the total number of shares and the date(s) of such activity.

These requirements are substantially similar to the current OTCBB rules; however, the amendments clarify that they apply to distributions of all OTC Equity Securities and are not limited to distributions of OTCBB-eligible securities.

Submission of notice to FINRA under Rule 5190

Pursuant to paragraphs (c)(1) and (d) of Rule 5190, the member firm acting as manager (or in a similar capacity) is responsible for notifying FINRA of the distribution. However, if no member firm is acting as manager (or in a similar capacity), then each firm that is a distribution participant or affiliated purchaser is required to notify FINRA, unless another member firm has assumed responsibility in writing for compliance with the notification requirement. Pursuant to Rule 5190(c)(2), a firm that is an issuer or selling security holder must comply with the notification requirements of paragraph (c)(1), unless another member firm has assumed responsibility in writing for compliance with those requirements. Similarly, pursuant to Rule 5190(e), a firm that intends to impose a penalty bid or effect a syndicate covering transaction is responsible for notifying FINRA, unless another member firm has assumed responsibility in writing for compliance with the rule.

Firms must use the following forms to provide notification under Rule 5190:

All notices under Rule 5190 must be submitted to FINRA's Market Regulation Department via email to [email protected]; fax to (301) 339-7403; or a third-party vendor (e.g., Dealogic, Ipreo), within the time periods prescribed by the rule. The notification required under Rule 5190 must not be sent to FINRA's Corporate Financing Department. Submission to the Corporate Financing Department does not constitute compliance with Rule 5190.

Firms are reminded that they must update any notification submitted to the Market Regulation Department, as necessary (e.g., a manager would update the notification if distribution participants were added after the restricted period commenced or if a deal was oversubscribed and the over-allotment option was exercised).

Nasdaq Stock Exchange rules impose certain notification requirements that are similar to those of Rule 5190. Firms that have an obligation under both FINRA and Nasdaq Stock Exchange rules are not required to submit two separate filings to FINRA's Market Regulation Department to satisfy those rules; rather, the forms that have been designed to satisfy FINRA rules also include fields for purposes of compliance with the comparable Nasdaq Stock Exchange rules.²⁹ Firms that are not subject to Nasdaq Stock Exchange rules would not be required to complete those additional fields.

Amendments to Marketplace Rules

FINRA's OTCBB and ADF marketplace rules include certain Regulation M-related requirements. Consistent with the amendments discussed above, and as part of the rule change approved by the SEC, FINRA has clarified the scope and application of these marketplace-specific requirements.

New FINRA Rule 6470 Relating to OTC Equity Securities

New FINRA Rule 6470 (Withdrawal of Quotations in an OTC Equity Security in Compliance with SEC Regulation M) requires that, in connection with a distribution of an OTC Equity Security, a firm must withdraw its quotations in the offered security to comply with the applicable restricted period under Regulation M. In addition, Rule 6470 prohibits the entry of stabilizing bids for OTC Equity Securities pursuant to Rule 104 of Regulation M. Because firms can withdraw their quotes in OTC Equity Securities without first requesting excused withdrawal status (as required under ADF rules), there is no notification requirement under Rule 6470.

Rule 6470 is substantially similar to current OTCBB rules; however, the amendments clarify that the requirements apply not only to OTCBB-eligible securities, but to all OTC Equity Securities quoted in any inter-dealer quotation system (e.g., OTCBB and Pink Sheets).

Amendments to FINRA Rule 6275 relating to ADF Market Makers

FINRA Rule 6275(f) (previously NASD Rule 4619A(f)) has been amended to conform to the language and structure of new Rule 6470. As amended, Rule 6275 requires that, in connection with a distribution of an NMS stock, an ADF Market Maker must submit a written request to ADF Operations and FINRA's Market Regulation Department to withdraw its quotations in the offered security in the ADF to comply with the applicable restricted period under Regulation M.³⁰ The request must be submitted no later than the business day prior to the first complete trading session of the restricted period under Regulation M, unless later notification is necessary under the specific circumstances.³¹

An ADF Market Maker also must submit a written request to ADF Operations and FINRA's Market Regulation Department to rescind the firm's excused withdrawal status. As part of that request, the firm must notify FINRA of the date and time of the pricing of the offering, the offering price and the time the offering terminated.³² The request must be submitted no later than the close of business the next business day following the pricing of the distribution.

The obligation to request excused withdrawal status and to subsequently rescind excused withdrawal status is on the ADF Market Maker that is posting quotations in the ADF; however, another member firm can assume responsibility—which must be in writing—for compliance on the ADF Market Maker's behalf. As amended, the rule no longer requires the manager of the distribution to submit the request on behalf of each firm participating in the distribution (of course, under the rule, a member firm acting as manager can agree, in writing, to do so on behalf of the firms).

Firms must use the following forms to satisfy their notification obligations under Rule 6275:

Firms must submit notification forms under Rule 6275 to FINRA's Market Regulation Department via email to [email protected]; fax to (301) 339-7403; or a third party vendor (e.g., Dealogic, Ipreo), and to ADF Operations via email to [email protected] or fax to (240) 386-6225, within the time periods prescribed by the rule.

To further assist firms, FINRA will publish a set of Frequently Asked Questions (FAQ) to facilitate firms' compliance with the amendments and the FAQ will be available on FINRA's Web site.

The rule amendments become effective on December 15, 2008.

¹ 17 CFR §242.100 to 105.

² "OTC Equity Security," as defined in FINRA Rule 6420 (formerly NASD Rule 6610), includes all non-exchange-listed securities, such as OTCBB and Pink Sheets securities.

³See Securities Exchange Act Release No. 58514 (September 11, 2008), 73 FR 54190 (September 18, 2008) (order approving SR-FINRA-2008-039). See also Regulatory Notice 08-57 (October 2008).

⁴See Securities Exchange Act Release No. 38067 (December 20, 1996), 62 FR 520 (January 3, 1997) (File No. S7-11-96) (Anti-Manipulation Rules Concerning Securities Offerings; Final Rules). See also generally SEC Staff Legal Bulletin No. 9, Frequently Asked Questions About Regulation M (April 12, 2002 update) at http://www.sec.gov/interps/legal/mrslb9.htm.

⁵See 17 CFR §242.100 (definition of "restricted period").

⁶ The exception for "actively traded" securities removes from Rule 101 of Regulation M securities with an ADTV value of at least $1 million where the issuer's common equity securities have a public float value of at least $150 million. For all other securities, the following standards apply in determining when the applicable restricted period commences: (1) for a distribution of a security with an ADTV value of at least $100,000, whose issuer has outstanding common equity securities having a public float value of at least $25 million, the restricted period begins one business day prior to pricing (or the date on which the person becomes a distribution participant), and (2) for a distribution of any other security, the restricted period begins five business days prior to pricing (or the date on which the person becomes a distribution participant). See 17 CFR §242.100 (definition of "restricted period") and 17 CFR §242.101(c)(1) ("actively traded" securities exception).

⁷See 17 CFR §242.100 (definitions of "stabilizing," "syndicate covering transaction," and "penalty bid"). In general terms, a "stabilizing bid" is a bid that is intended to maintain the price of the offered security and is necessary to prevent or retard a decline in the security's price. A "penalty bid" allows a lead underwriter to reclaim a selling concession paid to a syndicate member if that member's customers sell their allocated shares in the immediate aftermarket. A "syndicate covering transaction" is generally defined as placing a bid or effecting a purchase to reduce a syndicate short position.

⁸See Securities Exchange Act Release No. 56206 (August 6, 2007), 72 FR 45094 (August 10, 2007) (File No. S7-20-06) (Short Selling in Connection With a Public Offering; Final Rule).

⁹See 17 CFR §242.100 (definition of "distribution").

¹⁰See Securities Exchange Act Release No. 38067 (December 20, 1996), 62 FR 520 (January 3, 1997) (File No. S7-11-96) (Anti-Manipulation Rules Concerning Securities Offerings; Final Rules).

¹¹See 17 CFR §242.101(b)(10).

¹² FINRA's Member Regulation Department also monitors for compliance with Regulation M in the context of member firm exams.

¹³See 17 CFR §242.100 (definition of "covered securities").

¹⁴Rule 5190(c)(1)(A).

¹⁵ The contemplated date and time of commencement of the restricted period is to be based upon the firm's projected pricing date as of the date of submission of notice under this rule. FINRA recognizes that conditions may arise that may affect when or whether the offering actually prices.

¹⁶See 17 CFR §242.100 (definitions of "distribution participant" and "affiliated purchaser").

¹⁷ With respect to distributions of Nasdaq-listed securities, firms can rely on an Underwriting Activity Report (UAR) generated by FINRA's Market Regulation Department as the basis for determining the applicable restricted period.

¹⁸ In most instances, FINRA would expect to receive notification within the prescribed time frame, but may permit later notification in limited circumstances. Such determination would be made by FINRA's Market Regulation Department on a case-by-case basis. For example, there may be instances where the nature of the transaction has made it impossible to provide timely notice (e.g., a private investment in public equity (PIPE) offering is commenced and priced on the same day, and thus the firm could not have provided notice on the business day prior to the first complete trading session of the applicable restricted period).

¹⁹Rule 5190(c)(1)(B).

²⁰ In certain instances, e.g., PIPEs, this requirement may not be applicable.

²¹ In certain instances, e.g., PIPEs, this requirement may not be applicable.

²²See supra note 18.

²³Rule 5190(c)(1)(C).

²⁴See supra note 6.

²⁵Rule 5190(d)(1).

²⁶See supra note 18.

²⁷Rule 5190(d)(2).

²⁸See supra note 18.

²⁹ Firms must nonetheless comply with requirements under the Nasdaq Stock Exchange rules to provide notice to Nasdaq or Nasdaq MarketWatch, as applicable.

³⁰Rule 6275(f)(1).

³¹See supra note 18.

³²Rule 6275(f)(2).

ATTACHMENT A

Below is the text of the rule change. New language is underlined; deletions are in brackets.¹

* * * * *

5000. SECURITIES OFFERING AND TRADING STANDARDS AND PRACTICES

5100. SECURITIES OFFERINGS, UNDERWRITING AND COMPENSATION

* * * * *

5190. Notification Requirements for Offering Participants

* * * * *

6000. QUOTATION AND TRANSACTION REPORTING FACILITIES

* * * * *

6200. ALTERNATIVE DISPLAY FACILITY

* * * * *

6220. Definitions

* * * * *

6275. Withdrawal of Quotations

* * * * *

6400. QUOTING AND TRADING IN OTC EQUITY SECURITIES

* * * * *

6470. Withdrawal of Quotations in an OTC Equity Security in Compliance with SEC Regulation M

* * * * *

6500. OTC BULLETIN BOARD^® SERVICE

* * * * *

6540. Requirements Applicable to Market Makers

* * * * *

^1. This Attachment A reflects the amendments adopted pursuant to SR-FINRA-2008-039, as well as certain non-substantive technical changes to the underlying rule text adopted pursuant to SR-FINRA-2008-057 (filed for immediate effectiveness on December 3, 2008). Those rule filings are available at http://www.finra.org/Industry/Regulation/RuleFilings/2008/P038926 and http://www.finra.org/Industry/Regulation/RuleFilings/2008/P117483, respectively.

ATTACHMENT B

Underwriting Activity Report Request Form

Attention: FINRA Market Regulation Department

Please provide the following information (preferably at least two (2) business days prior to commencement of the restricted period or, if no restricted period applies, at least one (1) business day prior to pricing the distribution)

Acting in our capacity as manager of a potential secondary distribution of securities that are listed on the Nasdaq Stock Market, we request an underwriting activity report for the above covered security (subject and reference securities, as defined under SEC Regulation M Rule 100).

Submitted by

Firm name:____________________________________________________________________________

Date:_________________________________________________________________________________

Signature:______________________________________ Print name:_______________________________

Title:________________________________________________________________________________

Contact (if different from above):___________________________________________________________

Telephone number:________________________________ Fax number:____________________________

Email address:__________________________________________________________________________

Regulation M—Restricted Period Notification Form

Attention: FINRA Market Regulation Department; FINRA ADF Operations; Nasdaq Marketwatch Department

Please provide the following information

Original notification: yes no

Amended notification: yes no

Pursuant to FINRA Rule 5190(c)(1)(A), FINRA Rule 6275(f)(1), and/or NASDAQ Rule 4619(e)(1), we advise you that the following dealers are distribution participants, or affiliated purchasers. Additionally, for the dealers that are market makers, we request an excused withdrawal or, for Nasdaq-listed securities only, to be designated as passive market maker, as indicated:¹

Submitted by

Firm name:_________________________________________________________________________

Date:__________________________________________________________________________________

Signature:_____________________________________ Print name:____________________________

Title:__________________________________________________________________________________

Contact (if different from above):_______________________________________________________

Telephone number:____________________________ Fax number:____________________________

Email address:_________________________________________________________________________

Regulation M—Notice of Intent to Impose a Penalty Bid And/Or Engage In a Syndicate Covering Transaction

Attention: FINRA Market Regulation Department; Nasdaq Marketwatch Department

Please provide the following information

Original notification: yes no

Amended notification: yes no

Submitted by

Firm name:___________________________________________________________________________

Date____________________________________________________________________________

Signature:_________________________________ Print name:______________________

Title:____________________________________________________________________________

Contact (if different from above):_________________________________________________________

Telephone number:_______________________________ Fax number:__________________________

Email address:____________________________________________________________________________

Regulation M—Trading Notification Form

Attention: FINRA Market Regulation Department; FINRA ADF Operations; Nasdaq Marketwatch Department

Please provide the following information

Original notification: yes no

Amended notification: yes no

Issuer name and symbol:________________________________________________

Pursuant to the provisions of FINRA Rule 5190(c)(1)(B), FINRA Rule 5190(d)(2), FINRA Rule 6275(f)(2), and/or NASDAQ Rule 4619(e)(5), you are advised of the following information regarding the pricing of a distribution of securities. Additionally, for the distribution participants and/or affiliated purchasers identified below, to the extent that they are market makers, we request that you rescind the excused withdrawal status or passive market making status:

Pursuant to the provisions of FINRA Rule 5190(e)(2), you are advised of the listed activity on the date shown:

Submitted by

Firm name:____________________________________________________________

Date: ________________________________________________________________________________

Signature: _______________________________Print name: ____________________________

Title:____________________________________________________________

Contact (if different from above):________________________________________

Telephone number:____________________Fax number:____________________

Email address:____________________________________________________________

¹ Please indicate 'Excused' for dealers that are not market makers.