In light of the Financial Industry Regulatory Authority’s (FINRA) ongoing targeted examination of practices surrounding public and private offerings of small-capitalization exchange-listed issuers with business operations in foreign jurisdictions—such as China—financial institutions must immediately prioritize a comprehensive self-assessment of their current public and private offering practices. This review, detailed in FINRA’s October 2025 guidance, focuses on firms acting as underwriters, bookrunners, syndicate members, selling group members, or placement agents, as well as those engaged in initial allocations or secondary market trading, including via omnibus accounts.
Key Assessment Priorities:
- Supervisory and Compliance Frameworks: Evaluate all written supervisory procedures, compliance policies, manuals, training materials, and guidance related to due diligence, offering participation approvals, Regulation M compliance, and FINRA Rule 5210. Identify any variations or gaps over the period from January 1, 2023, to September 30, 2025, and implement updates to strengthen oversight of potential risks like market manipulation, insider trading, spoofing, layering, and wash trading.
- Offering Participation Details: Compile and review a detailed inventory of all small-cap offerings participated in during the relevant period, including issuer names, offering types (e.g., IPOs, follow-ons, private placements), firm roles, due diligence timelines, investor profiles, share pricing, compensation structures, and involved parties (e.g., auditors, law firms, consultants). Scrutinize contracts, engagement agreements, and any additional compensation received from issuers within 24 months before or after offerings to ensure transparency and conflict-free practices.
- Trading and Anti-Money Laundering (AML) Protocols: For firms handling initial allocations or secondary trading, assess AML programs, supervisory procedures for omnibus accounts, and monitoring tools (e.g., exception reports, alerts) for detecting suspicious activities in account openings, share deposits, trading, money movements, and customer due diligence. Verify that systems—whether proprietary or third-party—are effectively deployed to mitigate risks such as unauthorized access or coordinated trading.
Recommended Actions:
- Conduct Internal Audits: Assemble cross-functional teams (compliance, legal, trading) to perform immediate audits, focusing on offerings raising $25 million or less, priced between $4.00 and $8.00, to align with FINRA’s scrutiny parameters.
- Enhance Risk Mitigation: Update policies to address foreign jurisdictional challenges, including enhanced due diligence on issuers with operations abroad, and ensure robust investor protections for domestic retail and foreign institutional participants.
- Prepare for Regulatory Engagement: Document findings and remedial steps, as FINRA may request this information. Proactively engage external experts if needed to benchmark practices against industry standards.
- Timeline for Compliance: Initiate assessments promptly, within the next 30 days, and aim for an implementation of improvements in 1H2026 to demonstrate commitment to regulatory integrity.
This call to action underscores the critical need for proactive measures to safeguard market fairness, investor confidence, and institutional reputation amid heightened regulatory focus. Failure to assess and adapt could expose firms to enforcement risks—act now to fortify your practices. For full details, refer to FINRA’s guidance.
MCG Comply’s team can help your firm conduct the right assessment and assist in meeting implementation of the required improvements, reach out to info@mcgcomply.com.
