SEC Regulation M-Related Notice Requirements Under FINRA Rules Frequently Asked Questions

The following FAQ is provided to facilitate firms' compliance with FINRA Rules 5190 (Notification Requirements for Offering Participants), 6275 (Withdrawal of Quotations) and 6435 (Withdrawal of Quotations in an OTC Equity Security in Compliance with SEC Regulation M). A comprehensive overview of these rules and related guidance is set forth in Regulatory Notice 08-74 and Regulatory Notice 12-19.

Firms are reminded that in addition to the Regulation M-related notice requirements under FINRA rules, they may have other obligations, such as under the FINRA transaction reporting rules or the Regulation M-related rules of another self-regulatory organization (e.g., New York Stock Exchange or NASDAQ Exchange). For additional information regarding FINRA's Regulation M-related rules or assistance in completing and submitting the notifications required thereunder, firms should contact FINRA's Market Regulation Department via email or at (240) 386-5560.

Section 1: FINRA Notice Requirements
Section 2: SEC Regulation M
Section 3: Instructions for Submitting the FINRA Notifications

 

Section 1: FINRA Notice Requirements


Rule 5190

Q1.1. To what types of offerings do the notice requirements of FINRA Rule 5190 apply?
A1.1. The notice requirements of Rule 5190 apply to any offering of an exchange-listed security or an OTC equity security, as defined in Rule 6420, that meets the definition of a "distribution" and does not qualify as Excepted Activity under Rule 101(b)(10) or as an Excepted Security under Rule 101(c)(2), (3), or (4). The notice requirements of Rule 5190 apply to both securities subject to a restricted period and to those securities that are “actively traded.” A firm should review all of its offering activities to determine whether the Rule 5190 notice requirements apply, including, but not limited to:

  • initial public offerings
  • private investment in public equities (PIPE) offerings
  • follow-on or secondary offerings
  • private placements
  • shelf-registered distributions (initial and subsequent takedowns, or tranches)1
  • block transactions
  • "bought" offerings (e.g., see FAQ 1.30)
  • conversions of securities


Q1.2. Do the notice requirements of Rule 5190 apply to exchange-listed securities as well as OTC equity securities?
A1.2. Yes. The notice requirements of Rule 5190 apply to any exchange-listed security or OTC equity security, as defined in Rule 6420, that is a "covered security" under Regulation M.

Q1.3. As part of FINRA rulebook consolidation, Incorporated NYSE Rule 392 was deleted from the FINRA rulebook. Does this mean that my firm no longer has any obligations under NYSE rules?
A1.3. No. Although FINRA deleted Incorporated NYSE Rule 392 from FINRA's rulebook, firms that are members of the NYSE may have an obligation to report under NYSE Rule 5190 (which replaced NYSE Rule 392), in the form specified by the NYSE, with respect to securities offerings. Firms should consult with the NYSE for guidance on its rules.

Q1.4. Do the exemptions from the filing requirements under the Corporate Financing Rule (FINRA Rule 5110) apply to the notice requirements under Rule 5190?
A1.4. No. The exemptions under the Corporate Financing Rule do not apply to the notice requirements under Rule 5190.

Q1.5. When providing notice under Rule 5190, are firms required to submit a copy of the registration statement or other offering documents to FINRA?
A1.5. No. Under Rule 5190, firms are not required to submit a copy of the registration statement or other offering documents to FINRA's Market Regulation Department.

Q1.6. For a distribution that is subject to a restricted period, when must notice of the firm's determination of the applicable restricted period under Regulation M be provided to FINRA?
A1.6. Pursuant to Rule 5190(c)(1)(A), firms must provide notification to FINRA (via the Regulation M Restricted Period Notification) of the firm's determination of the applicable restricted period, and the basis for that determination, along with the contemplated date of commencement of the restricted period, 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.

Q1.7. If the market closes early for a holiday, does this shortened session constitute a complete trading session for purposes of providing notice under Rule 5190(c)?
A1.7. Yes. This shortened session constitutes a complete trading session for purposes of providing notice under Rule 5190.

Q1.8. If my firm provides notice that the restricted period will commence five days prior to pricing, are we required to submit information relating to the average daily trading volume (ADTV) value and public float value for the offered security?
A1.8. No. Firms can opt for a five-day "default" restricted period, in which case the firm does not have to provide information relating to the ADTV value and public float value for the security.

Q1.9. When must notice of the firm's determination that the "actively traded" securities exception applies under Regulation M be provided to FINRA?
A1.9. Pursuant to Rule 5190(d), a firm is required to provide notification to FINRA (via the Regulation M Trading Notification of the firm’s determination that the “actively traded” securities exception applies, and the basis for such determination, 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. 

Q1.10. What notifications are required to be provided to FINRA for distributions of “actively traded” securities?
A1.10. 
FINRA Rule 5190(d) requires firms to submit only one notification to FINRA for distributions in “actively traded” securities – i.e., the Regulation M Trading Notification, unless there is the existence of syndicate covering transactions, penalty bids and/or stabilizing (see, e.g., FAQ 1.22). Firms are not required to submit a Regulation M Restricted Period Notification for distributions in “actively traded” securities.

 

Q1.11. Are there separate Regulation M Trading Notifications for distributions in “actively traded” securities and distributions subject to a restricted period?
A1.11.
  No, the Regulation M Trading Notification includes a section for firms to provide notification of their determination that no restricted period applies under Rule 101 of SEC Regulation M and the basis for such determination.  This section only needs to be completed for “actively traded” securities.

 

Q1.12. When must notice that a distribution has been priced be provided to FINRA?
A1.12.
Firms must provide notice of pricing to FINRA (via the Regulation M Trading 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. This requirement applies to distributions that are subject to a restricted period (Rule 5190(c)(1)(B)) and distributions that qualify for the "actively traded" securities exception (Rule 5190(d)(2)).

 

Q1.13. What does "last sale before the distribution" in Rules 5190(c)(1)(B) and (d)(2) mean?
A1.13.
The "last sale before the distribution" means the last sale before pricing.

Q1.14. What are some examples of the "pricing basis" for purposes of Rules 5190(c)(1)(B) and (d)(2)?
A1.14. The pricing basis could be the last sale, a discount to the last sale price, a negotiated price or at-the-market, among others.

Q1.15. What does "trade date" in Rules 5190(c)(1)(B) and (d)(2) mean?
A1.15. "Trade date" means the first trade date that the shares from the distribution are available for trading in the aftermarket.

Q1.16. What does "SEC effective date and time" in Rules 5190(c)(1)(B) and (d)(2) mean?
A1.16. The "SEC effective date and time" is the date and time the SEC declares the distribution effective. In certain instances, e.g., PIPEs, this requirement may not be applicable.

Q1.17. My firm is a distribution participant of a distribution subject to Regulation M, but is not acting as the manager (or in a similar capacity). How does my firm determine whether it is required to submit notice to FINRA under Rule 5190?
A1.17. Your firm should contact the member firm acting as manager (or in a similar capacity) for the distribution to confirm that it is complying with the notice requirements under Rule 5190. If there is no member firm acting as manager, or if the firm acting as manager has failed to comply with Rule 5190, then your firm should submit the required notice(s) to FINRA.

Q1.18. My firm is not a market maker in the offered security. Are we still required to submit the applicable notifications to FINRA?
A1.18. The notifications are required regardless of market maker status. Thus, if your firm has a notice obligation under FINRA rules (see FAQ 1.17), you must submit the applicable notifications.

Q1.19. My firm is the manager of a distribution subject to Regulation M and will be submitting the applicable notifications to FINRA on behalf of the members of the syndicate. For purposes of Rule 5190(c)(1)(A) and (B) and Rule 5190(d)(2), are we required to provide notice of those distribution participants that are not market makers in the offered security?
A1.19. Yes, all distribution participants must be identified, regardless of their market maker status.

Q1.20. My firm has submitted a Regulation M Restricted Period Notification as required under Rule 5190(c)(1)(A). After the submission was made, an additional firm was invited and agreed to be a distribution participant. Is my firm required to submit an amended notification?
A1.20. Yes, an amended notification should be submitted immediately upon the addition of any new distribution participants.

Q1.21. Are there any notice requirements in Rule 5190 specifically applicable to firms that are issuers or selling security holders?
A1.21. Yes. Rule 5190(c)(2) requires that any member 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 notice requirements of Rule 5190(c)(1), unless another firm has assumed responsibility in writing for compliance with the rule. 

 

Penalty Bids, Syndicate Covering Transactions and Stabilizing Bids

Q1.22. When must notice of intent to impose penalty bids or engage in syndicate covering transactions, and confirmation of such activity, be provided to FINRA?
A1.22. Rule 5190(e)(1) requires firms to provide notice to FINRA (via the Notice of Intent to Impose a Penalty Bid, Engage In a Syndicate Covering Transaction and/or Enter a Stabilizing Bid) of their intent to impose a penalty bid or engage in a syndicate covering transaction in connection with an offering of an OTC equity security, prior to imposing the penalty bid or engaging in the first syndicate covering transaction. In addition, pursuant to Rule 5190(e)(2), firms are required to subsequently confirm such activity (via the Regulation M Trading Notification) within one business day of completion.

Q1.23. Do the notice requirements in Rule 5190(e) relating to penalty bids and syndicate covering transactions apply to all securities?
A1.23. No. Rule 5190(e) applies only to OTC equity securities, as defined in Rule 6420.

Q1.24. Do FINRA rules permit the entry of stabilizing bids in OTC equity securities?
A1.24. No. Rule 6435(a)(2) prohibits the entry of stabilizing bids in any OTC equity security, as defined in Rule 6420, pursuant to Rule 104 of Regulation M.

Q1.25. Does the prohibition in Rule 6435(a)(2) on the entry of stabilizing bids apply to all securities?
A1.25. No. Rule 6435(a)(2) applies only to OTC equity securities, as defined in Rule 6420. 

 

Withdrawal of Quotations

Q1.26. My firm is a distribution participant in a distribution of an OTC equity security that is subject to a restricted period under Regulation M. Is my firm required to withdraw its quotations in the offered security?
A1.26. Yes. Rule 6435 requires that distribution participants withdraw their quotations in the offered security in any quotation medium (e.g., the OTCBB or Pink Sheets) during the applicable restricted period.

Q1.27. Is my firm required to request "excused withdrawal" status prior to withdrawing its quotations in an OTC equity security during the applicable restricted period?
A1.27. No. Unlike the rules applicable to the ADF (see FAQ 1.28), firms are not required to request "excused withdrawal" status or otherwise provide notice to FINRA prior to withdrawing their quotations in an OTC equity security. Firms are still required, however, to submit the Regulation M Restricted Period Notification in accordance with the requirements of Rule 5190(c).

Q1.28. My firm is a distribution participant in a distribution of an NMS stock that is subject to a restricted period under Regulation M and is a Registered Reporting ADF Market Maker in the offered security. Is my firm required to withdraw its quotations in the offered security?
A1.28. Yes. Rule 6275(f)(1) requires that distribution participants request excused withdrawal status (via the Regulation M Restricted Period Notification) and withdraw their quotations in the ADF in the offered security during the applicable restricted period. Your firm must submit the request unless another member firm has assumed responsibility in writing for compliance with this rule.

Q1.29. When must a request for excused withdrawal status be made?
A1.29. A firm must request excused withdrawal status under Rule 6275(f)(1) 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.

Submitting Notice in Specific Scenarios

Q1.30. After the market closed, my firm received a call from an issuer interested in selling 1,000,000 shares of its stock off of its shelf registration statement at a price of $10.00 per share. During this phone call, my firm agreed to the terms and conditions and purchased all 1,000,000 shares at a price of $10.00 per share, with the intent of selling all of the shares to investors (often referred to as a "bought" offering). The entire transaction was completed prior to the market opening the following morning. My firm has determined that this offering meets the definition of a "distribution" and based on our calculation of the ADTV value and public float value, the offered security would have been subject to a one-day restricted period under Regulation M. Given that my firm had no knowledge of the distribution until after the market closed and the distribution was completed overnight, my firm could not have submitted the Regulation M Restricted Period Notification on the business day prior to the first complete trading session of the restricted period as required under FINRA rules. Is later submission acceptable under these circumstances?
A1.30. Yes, in this instance, later submission of the Regulation M Restricted Period Notification is warranted under Rule 5190(c)(1)(A), which requires notice of the firm's determination of the applicable restricted period 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.

Q1.31. My firm is the manager for a PIPE distribution that was commenced and priced on the same day. As a result, my firm could not have submitted the Regulation M Restricted Period Notification on the business day prior to the first complete trading session of the restricted period as required under FINRA rules. Is later submission acceptable under these circumstances?
A1.31. Yes, in this instance, later submission of the Regulation M Restricted Period Notification is warranted under Rule 5190(c)(1)(A), which requires notice of the firm's determination of the applicable restricted period 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.

Q1.32. My firm is participating in a PIPE distribution. Although the price of the distribution has been determined, my firm has not completed its participation in the distribution and its market making in the issue remains restricted. Rule 5190 requires submission of the Regulation M Trading Notification no later than the close of business on the day after the distribution price has been determined. When should my firm submit the Trading Notification in this instance?
A1.32. Under Rules 5190(c)(1)(B) (for distributions of securities subject to a restricted period) and 5190(d)(2) (for distributions of “actively traded” securities), firms are required to provide notice of pricing (via the Regulation M Trading Notification) no later than the close of business the next business day following pricing, unless later notification is necessary under specific circumstances. In this instance, later submission of the Trading Notification would be warranted; however, under no circumstance can the notification be filed later than the close of business on the day the distribution terminates.

 

Q1.33.  My firm is participating in an At-the-Market (“ATM”) distribution, and the security may be sold incrementally into the market over the course of several days, weeks or months.  When should a Regulation M Trading Notification be submitted notifying FINRA that an ATM distribution has priced, and does my firm need to include any additional information in the submission regarding the ATM?
A1.33.  Given the complexities of ATMs and the uncertainties as to when an ATM distribution will be completed, firms are required to provide notice of pricing (via the Regulation M Trading Notification) no later than the close of business the next business day following the first pricing of the ATM.  Firms also are required to provide an amended Trading Notification, no later than the close of business the next business day following the final pricing of the ATM, which lists each trade date the ATM was conducted and the aggregate number of shares and average price of the transactions for each trade date.

Q1.34. My firm has submitted a Regulation M Restricted Period Notification as required under Rule 5190(c)(1)(A). Due to market conditions, the issuer wants to postpone pricing the distribution for a day to see if the market changes. Is my firm required to submit an amended notification or a notification of postponement?
A1.34. Your firm is not required to submit an amended notification in this instance (provided that there are no material changes, such as the identities of all of the syndicate members). FINRA understands that a deal may not be priced in the time frame that was originally projected and as such, does not expect firms to amend their Regulation M Restricted Period Notification solely to update the contemplated date of pricing. For example, a firm submits a Regulation M Restricted Period Notification indicating that the contemplated date of pricing is June 1. On June 2, the decision is made to postpone pricing until June 3. The firm is not required to submit an amended notification to correct the contemplated pricing date to June 3. (The firm will indicate the actual pricing date on the Regulation M Trading Notification.)

In addition, in this instance, your firm is not required to submit notification of postponement of the distribution under Rule 5190(c)(1)(C). However, if the pricing becomes indefinite, your firm must submit such notification (see FAQ 1.35).

Q1.35. My firm has submitted a Regulation M Restricted Period Notification as required under Rule 5190(c)(1)(A). Based on discussions with the issuer, it has now become uncertain when, or even whether, the distribution will be priced. Is my firm required to submit notification of the postponement of the distribution under Rule 5190(c)(1)(C)?
A1.35. Yes. Your firm must submit notification of postponement of the distribution under Rule 5190(c)(1)(C) immediately once the pricing of the distribution has become indefinite.

 

Section 2: SEC Regulation M


Q2.1. What is a "distribution" under Regulation M?
A2.1. A "distribution" is defined under Regulation M as an offering of securities, whether or not subject to registration under the Securities Act, that is distinguished from ordinary trading transactions by the magnitude of the offering and the presence of special selling efforts and selling methods. See the SEC Staff Legal Bulletin No. 9, Frequently Asked Questions About Regulation M (April 12, 2002 update).

Q2.2. How has the SEC described the term "magnitude of the offering" in the definition of "distribution" under Regulation M?
A2.2. The SEC has stated that factors relevant to the "magnitude of the offering" element include: the number of shares to be registered for sale by the issuer and the percentage of the outstanding shares, public float and trading volume that those shares represent.2

Q2.3. How has the SEC described the term "special selling efforts and selling methods" in the definition of "distribution" under Regulation M?
A2.3. The SEC has stated that providing greater than normal sales compensation arrangements pertaining to the distribution; delivering a sales document, such as a prospectus or market letters; and conducting "road shows" are generally indicative of "special selling efforts and selling methods."3

Q2.4. How is the applicable restricted period determined under Regulation M?
A2.4. The exception for "actively traded" securities removes from Rule 101 of Regulation M securities with an average daily trading volume (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. Under Regulation M, the restricted period ends upon the person's completion of participation in the distribution.

Q2.5. What method can be used to calculate the ADTV for purposes of determining the applicable restricted period for a distribution under Regulation M?
A2.5. ADTV is defined in Rule 100 of Regulation M; however, the SEC has not designated acceptable information sources for determining ADTV. As explained by the SEC, "a distribution participant should have flexibility in determining a security's ADTV value from information that is publicly available, if such participant has a reasonable basis for believing that the information is reliable. . . . For instance, a distribution participant may rely on trading volume as reported by an SRO or comparable entity, or any other source believed to be reliable. Electronic information systems that provide information regarding securities in markets around the world could provide an easy means to determine worldwide trading volume in a particular security. Furthermore, in calculating the dollar value of ADTV, any reasonable and verifiable method may be used. For example, it may be derived from multiplying the number of shares by the price in each trade, or from multiplying each day's total volume of shares by the closing price on that day."4

Q2.6. How is public float value defined for purposes of determining the applicable restricted period for a distribution under Regulation M?
A2.6. As defined under Regulation M, "public float value" shall be determined in the manner set forth on the front page of Form 10-K even if the issuer of such securities is not required to file Form 10-K, relating to the aggregate market value of common equity securities held by non-affiliates of the issuer.

Q2.7. When is the price of an offered security "determined" for the purposes of applying the Regulation M restricted period?
A2.7. According to the SEC, the determination of the offering price occurs when the parties agree on the price, whether or not the agreement is memorialized in writing. See the SEC Staff Legal Bulletin No. 9, Frequently Asked Questions About Regulation M (April 12, 2002 update).

Q2.8. How is "completion of participation in a distribution" defined for purposes of determining the applicable restricted period under Regulation M?
A2.8. Pursuant to Regulation M, a person's role in the distribution determines when its completion of participation in the distribution occurs (e.g., for an underwriter, this generally is when its participation has been distributed). The SEC has stated that generally, each syndicate member's participation in a distribution is completed when all of the shares in the offering have been distribution and after any stabilization arrangements and trading restrictions in connection with the distribution have been terminated. For a selling group member that is not part of the underwriting syndicate, its participation in a distribution is completed when the selling group member has sold its entire allotment.5

Q2.9. Who is considered a distribution participant?
A2.9. A "distribution participant" is defined under Regulation M as any underwriter, prospective underwriter, broker, dealer or other person who has agreed to participate or is participating in a distribution.

Q2.10. What is a "covered security" under Regulation M?
A2.10. A "covered security" is defined under Regulation M as any security that is the subject of a distribution (a "subject security") or any reference security.

Q2.11. What is a "reference security" under Regulation M?
A2.11. A "reference security" is defined under Regulation M as a security into which a subject security may be converted, exchanged or exercised, or which, under the terms of the subject security, may in whole or in significant part determine the value of the subject security.

 

Section 3: Instructions for Submitting the FINRA Notifications


Q3.1. Where do firms submit the notices required under Rule 5190?
A3.1. All notices under Rule 5190 must be submitted to FINRA's Market Regulation Department electronically through the FINRA Firm Gateway or through a third-party vendor (e.g. Dealogic, Ipreo, etc.).

Q3.2. Should the notices required under Rule 5190 be submitted to FINRA's Corporate Financing Department?
A3.2. No. The notices required under Rule 5190 should be sent to FINRA's Market Regulation Department (see Q3.1). Submission to the Corporate Financing Department does not constitute compliance with Rule 5190.

Q3.3. Where do firms submit the notices required under Rule 6275?
A3.3. The notices under Rule 6275 must be submitted to FINRA's Market Regulation Department electronically through the FINRA Firm Gateway or through a third-party vendor (e.g. Dealogic, Ipreo, etc.).

 

Q3.4. Is there guidance relating to the electronic process for submission of notice under Rules 5190 and 6275?
Q3.4. Firms should refer to Regulatory Notice 12-19 for guidance relating to the electronic submission process, including information on obtaining access to the FINRA Gateway.

 

Q3.5. Can firms submit the notifications required under FINRA Rules 5190 and 6275 through a third party vendor, rather than through the FINRA Gateway?
A3.5. Yes, firms have the option of using a third party vendor to submit the requisite notifications electronically on their behalf.

Q3.6. Is notice to FINRA sufficient for purposes of complying with the notice requirements under NASDAQ Exchange rules?
A3.6. Firms should consult NASDAQ for guidance regarding their obligations under NASDAQ Exchange rules.
 


 

1 According to the SEC, a firm must examine individually each takedown off a shelf (sometimes referred to as a "tranche") to determine whether it constitutes a "distribution" under Regulation M. See 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).

 

2 See Securities Exchange Act Release No. 33924, 59 FR 21681 (April 26, 1994) (Review of Anti-manipulation Regulation of Securities Offerings; Concept Release).

 

3 See Securities Exchange Act Release No. 33924, 59 FR 21681 (April 26, 1994) (Review of Anti-manipulation Regulation of Securities Offerings; Concept Release).

 

4 See 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 SEC Staff Legal Bulletin No. 9, Frequently Asked Questions About Regulation M (April 12, 2002 update).

 

5 See 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 SEC Staff Legal Bulletin No. 9, Frequently Asked Questions About Regulation M (April 12, 2002 update).