FINRA Expands Regulation of IPO Allocations
FINRA has expanded regulation of new issues and has notified the industry that its modified New Issue Rule goes into effect on May 27, 2011. The New Issue Rule addresses the allocation of IPO securities, although the rule does not apply to investment company securities. The Rule prohibits (a) paying excessive compensation to a broker-dealer as compensation to receive an IPO allocation (i.e. no quid pro quos), (b) spinning allocations to executives of current or potential investment banking clients, and (c) penalizing specific brokers whose retail clients flip shares. The Rule also requires the book-running lead manager to provide IOI and allocation reports to the issuer.
OUR TAKE: Fund sponsors should examine the “New Issue” disclosure in their offering documents to conform to the new rule.