NASD Notice to Members 02-55 - August 2002

NASD Requests Comment on Proposed New Rule 2712 (IPO Allocations and Distributions) and on an Amendment to Rule 2710 (Corporate Financing Rule); Comment Period Expires September 9, 2002.

Executive Summary

NASD is proposing to create new Rule 2712 and amend existing Rule 2710 to prohibit certain IPO allocation abuses. The federal securities laws and existing NASD rules already prohibit certain IPO allocation abuses. These laws and rules would continue to apply if NASD adopts proposed new Rule 2712. Nevertheless, new, specifically targeted provisions in Rule 2712 would aid member compliance efforts and help to maintain investor confidence in the capital markets. In particular, the proposal would expressly prohibit the following types of conduct:

  • the allocation of IPO shares as consideration or inducement for the payment of excessive compensation for other services provided by the member;
  • the solicitation of aftermarket orders for the allocation of IPO shares;
  • the allocation of 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 member, or as consideration for investment banking services previously rendered; and
  • the imposition of a penalty on registered representatives whose retail customers have "flipped" IPO shares when similar penalties have not been imposed with respect to syndicate members.

The proposal would require members to adopt procedures reasonably designed to ensure that the requirements and prohibitions in Rule 2712 are followed. The proposal also would amend Rule 2710 to allow NASD to collect certain data on potential "spinning" abuses from members.

 

As noted, written comment should be submitted to Barbara Z. Sweeney. Questions concerning this Notice to Members — Request for Comment may be directed to Joseph E. Price, Director, Corporate Financing Department, NASD Regulatory Policy and Oversight, at (240) 386-4623, or Gary Goldsholle, Associate General Counsel, NASD, Regulatory Policy and Oversight, at (202) 728-8104.