FINRA has commenced a targeted review of member firm practices relating to public and private offerings undertaken by small-cap, exchange-listed issuers with business operations in foreign jurisdictions, including China (collectively, “small-cap offerings”). The review focuses on (i) firms that have participated in multiple small-cap offerings as an underwriter, bookrunner, syndicate member, selling group member, or placement agent and (ii) firms that have engaged in initial and/or secondary market trading related to these offerings, including those using omnibus accounts. The review covers the period of January 1, 2023 through September 30, 2025 (the “Relevant Period”) and encompasses “initial public offerings raising $25 million or less and priced between $4.00 and $8.00, and follow-on offerings and private placements involving those issuers.”
For a firm that participated in small-cap offerings as either an underwriter, bookrunner, syndicate member, selling group member or placement agent, FINRA is requesting the firm’s written supervisory procedures (“WSPs”) as well as compliance policies, manuals, training materials, compliance bulletins, and any other written guidance (collectively, “compliance materials”) relevant to such offerings, including with respect to (i) due diligence and the review and approval of the firm’s participation in such offerings, (ii) Regulation M, and (iii) FINRA Rule 5210 (Publication of Transactions and Quotations). FINRA also requires detailed information (e.g., issuer name, type of offering, role in the offering, dates on which firm commenced and concluded its due diligence review) for each small-cap offering in which the firm participated. Finally, for each offering, the firm must provide any engagement agreements, advisory agreements, or other contracts to which the firm was a party.
For a firm that was involved in initial allocation or secondary market trading related to small-cap offerings, FINRA is requesting the following documentation: a copy of the firm’s written anti-money laundering (“AML”) compliance program; WSPs and compliance materials relevant to securities trading (e.g., market manipulation); and WSPs and compliance materials specific to the supervision of omnibus accounts. Furthermore, the firm must provide a list of all surveillance tools (e.g., exception reports, alerts, monitoring systems) used to supervise trading as well as to detect and cause the reporting of suspicious activity in connection with account openings, the deposit/delivery-in of shares, trading, money movements, unauthorized access to customer accounts and ongoing customer due diligence.
Please see the Targeted Exam Letter for further details.