Notice to Members 03-72

Request for Comment on Regulatory Approaches to Enhance IPO Pricing Transparency

Comment Period Expires January 9, 2004
Note: The comment period has been extended to January 23, 2004.

NASD is proposing additional amendments to proposed Rule 2712—IPO Allocations and Distributions. On September 15, 2003, NASD filed with the Securities and Exchange Commission (SEC) proposed Rule 2712 to prohibit certain abuses in the allocation and distribution of shares in IPOs. The additional amendments would implement several recommendations of the NYSE/NASD IPO Advisory Committee (IPO Advisory Committee or Committee), which was established at the request of the SEC. On May 29, 2003, the IPO Advisory Committee issued a report with 20 recommendations for the self-regulatory organizations (SROs) and the SEC to enhance public confidence in the integrity of the IPO process.

The proposed amendments to proposed Rule 2712 would address the following recommendations of the NYSE/NASD IPO Advisory Committee for SRO rulemaking:

  • Require the lead managing underwriter to disclose indications of interest and final allocations to the issuer’s pricing committee;
  • Prohibit acceptance of market orders to purchase IPO shares in the aftermarket for one trading day following an IPO;
  • Impose procedures designed to ensure that reneged IPO allocations are not used to benefit favored clients of the underwriter;
  • Require that any lock-up that applies to shares owned by the issuer’s officers and directors also applies to shares they purchase in “friends and family” programs; and
  • Impose new notification requirements when underwriters waive lock-ups.

The Notice also requests comment on various additional regulatory steps that might be adopted to promote transparency in IPO pricing. These possible approaches, which could be adopted as alternatives, include requiring underwriters to:

  • Retain an independent broker/dealer to opine that the initial IPO price range at which the offering is marketed and the final offering price are reasonable and to require that the independent broker/dealer’s opinion is disclosed in the prospectus; or
  • Use an auction or other system to collect indications of interest to help establish the final IPO price; or
  • Include a “valuation disclosure” section in the prospectus with information about how the managing underwriter and issuer arrived at the initial price range and final IPO price, such as the issuer’s one-year projected earnings or P/E ratios and share price information of comparable companies.

As noted, written comment should be submitted to Barbara Z. Sweeney. Questions concerning this Notice should be directed to Thomas M. Selman, Senior Vice President, Corporate Financing/Investment Companies, NASD, at (240) 386-4623; Joseph E. Price, Vice President, Corporate Financing Department, NASD, at (240) 386-4623; or Gary L. Goldsholle, Associate General Counsel, Office of General Counsel, NASD, at (202) 728