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FINRA

 

FOR RELEASE
CONTACTS:
Thursday, July 25, 2002
Nancy A. Condon 202-728-8379
Michael Shokouhi 202-728-8304



NASD Board Approves Proposed Conduct Rules for IPO Activities

Washington, D.C. — NASD's Board of Governors approved new rules governing initial allocations of securities (IPOs) that would ban, among other things, the practices of "spinning," "laddering" and quid pro quo agreements. These new rules are a result of a review by NASD of current industry practices, and will be published for public comment and will require the approval of the Securities and Exchange Commission (SEC).

 

"These proposed rules will clearly identify unacceptable conduct associated with IPO allocation and distribution," said Robert R. Glauber, Chairman and CEO of NASD. "IPO shares cannot be allocated in a manner that puts an investment bank’s interests above those of its customers. It is critical that investors have confidence in the integrity of the IPO process."

 

The proposed rules will prohibit the following:

  • Quid Pro Quo Agreements. The rules would prohibit the allocation of IPO shares in exchange for excessive compensation relative to the service provided by the underwriter. This provision would expressly prohibit not only IPO allocations in return for inflated commissions; it also would prohibit an allocation in return for a "pay-up" for any service offered by the investment bank.
  • "Laddering" or Aftermarket Tie-in Agreements. The rules would prohibit the solicitation of aftermarket orders for the allocation of IPO shares. Current SEC and NASD rules exist in this area; however, this rule would clarify that aftermarket tie-in agreements violate NASD conduct rules.
  • "Spinning." The rules would prohibit a brokerage firm from allocating IPO shares to an executive officer or director of a company on the condition that the officer or director send the company’s investment banking business to the brokerage firm. The rules also would prohibit an IPO allocation to an executive officer or director as consideration for investment banking services previously rendered.

    In order to enable NASD to monitor compliance with this provision, book running managers would have to file with NASD information regarding the allocation of IPO shares to corporate executive officers and directors of a company that is being taken public.

  • Inequitable Penalty Bids. The rules would better ensure a level playing field by prohibiting NASD members from penalizing registered representatives whose retail customers have "flipped" IPO shares when similar penalties have not been imposed with respect to institutional accounts.
  • Requirement for Procedures. The rules would require NASD members that participate in IPOs to adopt procedures designed to ensure that the requirements and prohibitions of these proposed rules are followed.

 

The proposed rules will be made available for public comment in a Notice to Members prior to being submitted to the SEC for approval.

 

NASD is the leading private-sector provider of financial regulatory services, dedicated to bringing integrity to the markets and confidence to investors through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business – from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and member firms. For more information please visit www.nasd.com.