Required Notification Related to IPOs and Secondary Offerings

These are notice and quotation duties, not trading prohibitions. Neither rule bans a trade; the trading prohibition is Regulation M itself. What these rules do is tell FINRA that Regulation M has attached, and clear the member's quotations in the security while it runs.

Who Owes the Notices, and Why?

The Regulation M notice rule sets the notice requirements applicable to all members participating in offerings of securities, for purposes of monitoring compliance with the provisions of SEC Regulation M. In addition to those requirements, members also must comply with all applicable rules governing the withdrawal of quotations in accordance with Regulation M.

The notices are always written notice to FINRA, in such form as FINRA specifies.

Exam Tip: Gotchas

• The rule states its own purpose as surveillance. FINRA uses these notices to monitor Regulation M compliance, and each notice carries its own deadline rather than one common clock.

What Must the Manager of a Restricted-Period Distribution File?

A member acting as a manager (or in a similar capacity) of a distribution of any security that is a covered security subject to a restricted period under Regulation M's distribution participant rule must provide written notice of three things.

If no member is acting as a manager (or in a similar capacity) of the distribution, then each member that is a distribution participant or affiliated purchaser must provide that notice, unless another member has assumed responsibility in writing for compliance therewith.

The same duties reach the other side of Regulation M. Any member that is an issuer or selling security holder in a distribution of a covered security subject to a restricted period under Regulation M's issuer and selling security holder rule shall comply with those same notice requirements, again unless another member has assumed responsibility in writing.

Exam Tip: Gotchas

• Only two of the three notices carry the "unless later notification is necessary" qualifier. The cancellation notice is due immediately, with no such escape.
• The determination notice is due before the restricted period's first complete trading session. It is not due when the period begins, but by the business day prior to that first complete session.
• A written assumption of responsibility shifts the duty; an informal understanding does not. The rule requires another member to have assumed responsibility in writing.

What Must the Manager of an Actively-Traded Distribution File?

Where the security is considered an "actively traded" security under Regulation M's distribution participant rule, the manager files a different pair of items:

• The member's determination that no restricted period applies under the distribution participant rule, and the basis for that determination.
• The pricing of the distribution, including the security name and symbol, the type of security, the number of shares offered, the offering price, the last sale before the distribution, the pricing basis, the SEC effective date and time, the trade date, and identification of the distribution participants and affiliated purchasers.

That notice is due 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. Where no member is acting as a manager (or in a similar capacity), each member that is a distribution participant or an affiliated purchaser must provide it, unless another member has assumed responsibility in writing.

Exam Tip: Gotchas

• The actively-traded pricing notice has no restricted period element. Its content list is otherwise the same as the restricted-period pricing notice, which does include the restricted period.
• An actively-traded distribution still generates a filing. The manager reports that no restricted period applies, rather than reporting nothing.

What Notice Do Penalty Bids and Syndicate Covering Transactions in OTC Equity Securities Require?

A member imposing a penalty bid or engaging in a syndicate covering transaction in connection with an offering of an OTC Equity Security, under Regulation M's stabilization rule, must provide written notice to FINRA of two things, unless another member has assumed responsibility in writing for that paragraph:

• The member's intention to conduct such activity, prior to imposing the penalty bid or engaging in the first syndicate covering transaction, including identification of the security and its symbol and the date such activity will occur.
• Confirmation that the member has imposed a penalty bid or engaged in a syndicate covering transaction, within one business day of completion of such activity, including identification of the security and its symbol, the total number of shares and the date or dates of such activity.

An OTC Equity Security is any equity security that is not an NMS stock (a national market system stock) as Regulation NMS defines that term, provided, however, that the term does not include any Restricted Equity Security, which is an equity security meeting the definition of a restricted security under the restricted securities resale safe harbor.

Exam Tip: Gotchas

• The intention notice is due before the first covering transaction, not before each one. The confirmation notice then follows within one business day of completion of the activity.
• Each notice names its own content list, and they differ. The intention notice carries the date the activity will occur; the confirmation notice carries the total number of shares and the dates it occurred.
• A Restricted Equity Security is carved out of the definition. A security that is not an NMS stock can still fall outside the OTC Equity Security definition on that ground.

What Must a Member Do With Its Quotations?

The Regulation M quotation withdrawal rule reaches a member that is a distribution participant, affiliated purchaser, selling security holder or issuer in a distribution of an OTC Equity Security that is a covered security subject to Regulation M's distribution participant rule or its issuer and selling security holder rule, and is entering quotations in that security.

Such a member must do two things, unless another member has assumed responsibility in writing for compliance:

• Withdraw all quotations in the OTC Equity Security to comply with the applicable restricted period.
• Not enter a stabilizing bid for the OTC Equity Security under Regulation M's stabilization rule.

Both duties are conditioned on the member actually entering quotations in the security. A member with no quotations has nothing to withdraw.

Exam Tip: Gotchas

• The quotation rule reaches four categories of member at once. It names a distribution participant, an affiliated purchaser, a selling security holder and an issuer, in each case one entering quotations in the security, so the duty does not depend on which Regulation M rule binds the firm.
• This is a quotation duty, not a trading ban. The prohibition on bidding and purchasing comes from Regulation M itself; this rule clears the member's quotations in that over-the-counter equity security, unless another member has assumed responsibility in writing.

What Should You Check on Exam Day?

• Ask whether a member is acting as manager or in a similar capacity; if none is, the duty falls on each distribution participant and affiliated purchaser.
• Look for a written assumption of responsibility by another member before excusing a filing.
• Match the timing: determination before the first complete trading session, pricing by close of business the next business day, cancellation immediately.
• On an over-the-counter penalty bid, separate the pre-activity intention notice from the confirmation due within one business day of completion.
• Confirm the security is not an NMS stock, and is not a Restricted Equity Security, before applying the OTC notice and quotation rules.