FINRA proposes to simplify the spinning provision in new FINRA Rule 5131, New Issue Allocations and Distributions.  FINRA also would delay the implementation date of paragraphs (b) [Spinning] and (d)(4) [Market Orders], as discussed below.  FINRA originally announced in Regulatory Notice 10-60 that the rule would go into effect on 5/27/11.  As proposed, the start date for these paragraphs would be pushed back to 9/26/11. 

        Paragraph 5131(b), Spinning.   This provision implements a recommendation from the IPO Advisory Committee Report to prohibit "spinning" – i.e., an underwriter’s allocation of IPO shares to directors or executives of investment banking clients in exchange for receipt of investment banking business.  The Rule primarily prohibits spinning through a series of prophylactic prohibitions on the allocation of new issues.  Specifically, the rule prohibits allocations of a new issue to any account in which an executive officer or director of a public company or a covered non-public company, or a person materially supported by such executive officer or director, has a beneficial interest:

• if the company is currently an investment banking services client of the member or the member has received compensation from the company for investment banking services in the past 12 months;
• if the person responsible for making the allocation decision knows or has reason to know that the member intends to provide, or expects to be retained by the company for, investment banking services within the next 3 months; or
• on the express or implied condition that such executive officer or director, on behalf of the company, will retain the member for the performance of future investment banking services.

Paragraph (b)(1) requires members to establish, maintain and enforce pols and procedures reasonably designed to ensure that IB personnel have no involvement or influence, directly or indirectly, in the new issue allocation decisions of the member.  However, because the term “investment banking personnel” isn't defined in the Rule, this might result in certain necessary functions traditionally performed by syndicate personnel to be prohibited.  Accordingly, FINRA proposes to delete paragraph (b)(1).  These anti-spinning provisions are covered elsewhere, inasmuch as firms currently are required to have written pols and procedures re: the spinning prohibitions in paragraph (b)(2) pursuant to NASD Rule 3010. 

        Paragraph (d)(4), Market Orders.   This provision prohibits members from accepting any market order for the purchase of shares of a new issue in the secondary market prior to the commencement of trading of such shares in the secondary market.  Members have requested additional time to develop a process for reliably identifying new issues and to modify their order handling systems to prevent the acceptance of market orders in new issue shares in contravention of the Rule.  FINRA believes the Rule must carefully balance the investor protection concerns with needs of issuers in capital formation and market participants in price discovery.

For further details, go to:   [FINRA Rule Filing 11-17, 4/18]