NASD proposes rules to halt IPO abuses

More disclosures, fewer select allocations wanted

November 25, 2003|By BLOOMBERG NEWS

NEW YORK - The National Association of Securities Dealers, the brokerage industry's own regulator, proposed new rules yesterday to end abuses in initial public stock offerings that investors say have cost them billions of dollars in losses.

The rules would force underwriters that manage such sales to disclose how many people applied to buy the shares and how the shares ultimately were divided up. The rules would also prohibit brokers from accepting "market orders" to buy IPO shares at prevailing market prices for one trading day after the sale.

The NASD is targeting certain IPO practices after allegations from investors that new stock offerings were rigged and that investment banks allocated shares of sought-after stocks to company executives to lure other business.

"It's an effort to target the worst abuses," said Roy Smith, a former Goldman Sachs Group Inc. partner who is now a professor of finance at New York University. "The NASD is saying here are the doors you can't pass through."

Market orders were the source of first-day gains in many Internet IPOs as investors shut out of the sale placed orders to buy in initial trading. Many such orders were filled after the share price had doubled or tripled, leaving investors with losses after prices subsequently declined.

Other new rules would extend "lockup" periods, when officers and directors aren't able to sell shares, to include shares received by customers or associates of the issuing company in so-called "friends and family" programs. They would also impose new notification requirements when lockup periods are waived. Underwriters also could not use reneged trades to benefit favored clients, the proposed rules say.

The proposal comes five months after Razorfish Inc., Red Hat Inc. and 307 other companies that went public during the Internet boom of the late 1990s reached a $1 billion settlement with investors who said their stock offerings were rigged.

"These proposals further address conflicts of interest in the IPO market, and are an important addition to the regulatory initiatives that address abusive and unethical practices that have occurred with IPOs," NASD Chairman and Chief Executive Officer Robert R. Glauber said in a statement.

In 2002, Credit Suisse First Boston Corp. agreed to pay $100 million to settle Securities and Exchange Commission charges that the firm allotted IPO shares in exchange for investor kickbacks in the form of trading fees. Frank Quattrone, CSFB's former top executive in Silicon Valley, was charged by the NASD this year with "spinning," or giving access to IPOs to executives in return for future business. He is to be retried after a mistrial was declared last month.

The NASD said it would also request public comment on additional measures to insure the fair pricing of newly offered shares.

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