FINRA has adopted new FINRA Rule 5131 - effective on 5/27/11 - that further and more specifically prohibits certain abuses in the allocation and distribution of new issues.  Among other things, the rule prohibits quid pro quo allocations and “spinning,” and addresses the conduct of member firms and associated persons in the areas of book-building, new issue pricing, penalty bids, trading and waivers of lock-up agreements.

Office of General Counsel Contacts:  Gary Goldsholle, @ (202) 728-8104;  Racquel Russell, Assistant @ (202) 728-8363.   For complete details, click onto:   [FINRA RegNote 10-60, November]

Rule 5131 incorporates the definition of “new issue” from Rule 5130, Restrictions on the Purchase and Sale of Initial Equity Public Offerings - which enumerates exceptions and addresses the types of IPOs for which the protections of the rule are most appropriate.  The term “new issue” refers to an IPO "of an equity security as defined in Section 3(a)(11) of the Exchange Act, made pursuant to a registration statement or offering circular.” 

    Prohibition on Abusive Allocation Arrangements.   Rule 5131(a), Quid Pro Quo Allocations, prohibits a firm from using an allocation of a new issue to obtain a “kick back” from the recipient in the form of excessive compensation for other services offered by the member. 

• No member or associated person may offer or threaten to withhold shares it allocates of a new issue as consideration or inducement for the receipt of compensation that is excessive in relation to the services provided by the member. 
• So-called quid pro quo activity is prohibited, not only with respect to trading services, but with any service offered by the member.  Excessive compensation will be based factors, including, where applicable, the level of risk and effort involved in the transaction and the rates generally charged for such services.

    Spinning.   Rule 5131(b), Spinning, prohibits allocations of new issues to executive officers and directors of current, and certain former or prospective, investment banking clients.  Such allocations creates the appearance of impropriety and has the potential to divide the loyalty of the agents of the company.  Members must establish, maintain and enforce policies and procedures reasonably designed to ensure that investment banking personnel have no involvement or influence, directly or indirectly, in the new issue allocation decisions of the member.  

Flipping  ...  Reports of Indications of Interest and Final Allocations  ...  Lock-Up Agreements  ...  Agreement Among Underwriters  ...  Market Orders.   FINRA wraps up the Regulatory Notice with these 5 topics.  To continue reading, click on above link.