New FINRA Rule 5141, Sale of Securities in a Fixed Price Offering, protects the integrity of fixed price offerings by ensuring that securities in such offerings are sold to the public at the stated public offering price or prices.  It prohibits the grant of certain preferences - e.g., selling concessions, discounts, other allowances or various economic equivalents - in connection with such offerings.  The rule takes effect on 2/8/11 - Mark Your Calendars.

    General Requirements; Definition of 'Reduced Price'.   Rule 5141(a) provides that no member firm its associated person ("AP") that participates in a selling syndicate or selling group in connection with a fixed price offering may offer or grant, directly or indirectly, to any person or account that's not a member of the selling syndicate or selling group, any securities in the offering at a price below the stated public offering price - i.e., a “reduced price.”  As defined in Rule 5141.01, “reduced price” includes, without limitation:

any offer or grant of any selling concession, discount or other allowance, credit, rebate, reduction of any fee (including any advisory or service fee), any sale of products or services at prices below reasonable commercially available rates for similar products and services (except for research, which is subject to Rule 5141.02), or any purchase of or arrangement to purchase securities from the person or account at more than their fair market price in exchange for securities in the offering.  

The requirements of the new rule would apply until the offering terminates or until a member, having made a bona fide public offering of the securities, is unable to continue selling such securities at the stated public offering price.   Under the rule, securities in a fixed price offering are presumed salable if they immediately trade in the secondary market at a price or prices which are above the stated public offering price.

    Sales to Affiliated Persons.   Subject to the requirements of FINRA Rule 5130, a member of a selling syndicate or selling group is permitted to sell securities in the offering to an affiliated person, provided the member doesn't sell the securities to the affiliated person at a reduced price.  Transactions between a member of a selling syndicate or selling group and an AP that are part of the normal and ordinary course of business and are unrelated to the sale or purchase of securities in a fixed price offering shall not be deemed to confer a reduced price under the new rule. 

    Research.   Nothing in the new rule prohibits a member firm or its AP that participates in a selling syndicate or selling group from selling securities in the offering to a person or account to which it has provided or will provide research, as long as the person or account pays the stated public offering price for the securities and the research is provided pursuant to the requirements of Section 28(e) of the Exchange Act - i.e., "Soft Dollar Rules."  Investment management or investment discretionary services are not research for purposes of the provision.  The rule further requires that any product or service provided by a member or person associated with a member that doesn't qualify as research must not confer a reduced price.

    Investment Advisers.   A member that's an investment adviser is permitted to exempt securities that are purchased as part of a fixed price offering from the calculation of annual or periodic asset-based fees that the member charges a customer, provided the exemption is part of the member’s normal and ordinary course of business with the customer and is not in connection with an offering.

For further details, click onto:   [ RegNote 10-47, October ]