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With IPO Interest Reviving, NASD Proposes Safeguards

The reforms would provide some protection for smaller investors, regulators say.

November 25, 2003|Tom Petruno | Times Staff Writer

Securities regulators on Monday proposed a set of rules aimed at giving average investors a fairer shake in the market for initial public stock offerings.

The proposals came on one of the busiest days for new stock deals in three years -- another sign that investors' interest in the scandal-tainted IPO market is picking up, as memories of the dot-com bust recede.

But unlike during the last boom, this year's hot IPOs aren't dominated by technology issues.

The National Assn. of Securities Dealers, the brokerage industry's self-regulatory group, said its reform ideas would provide some safeguards for smaller investors who in the past got caught on the wrong side of trading by more sophisticated Wall Street players.

For example, brokerages would have to publicly announce when they waive so-called lock-up provisions that are meant to restrict IPO company insiders from dumping personal shares.

The proposals also would provide a stock-issuing company with more guidance from brokerages about the level of investor demand for the firm's IPO before the offering date.

That would address one of the rampant abuses of the late-1990s dot-com rush, when many brokerages were accused of setting hot IPO prices far below what the market would bear -- in effect cheating the issuing companies out of capital while rewarding investors who bought the stocks and watched them immediately soar.

Mary L. Schapiro, NASD's regulatory chief, said that enhanced guidance from underwriting brokerages could "greatly improve an issuer's participation in setting the price" of its IPO.

Besides asking for public comment on those and other ideas Monday, NASD put three separate concepts on the table, including whether every IPO should get a "fairness" opinion of its price from a brokerage not involved in the deal.

NASD also asked whether a little-used "auction" IPO process championed by San Francisco investment bank W.R. Hambrecht & Co. should get more encouragement. The system is designed to have the marketplace, rather than underwriters, set a stock's IPO price.

Federal and state securities cops have been wrestling with how to change the rules in the IPO market since 2001, when the collapse of many technology stock offerings from 1999 and 2000 left many small investors holding worthless shares.

The bust was followed by allegations that brokerages conspired with favored clients to pump up IPO prices just long enough for individual investors to jump aboard the bandwagon.

The collapse of the IPO market starting in 2001 has shut off a crucial capital-raising avenue for many smaller companies.

IPO abuses were partly addressed in the $1.4-billion analyst-research settlement that 10 major brokerages reached with state and federal regulators earlier this year. They also were at the heart of the federal criminal charges against Silicon Valley investment banker Frank Quattrone -- a case that resulted in a hung jury in October. Prosecutors say they will retry him.

NASD said the reforms proposed Monday drew in part on recommendations from a joint NASD/New York Stock Exchange IPO advisory committee that issued a report in May. That 14-member committee included John J. Brennan, head of mutual fund giant Vanguard Group; Daniel P. Tully, former chairman of Merrill Lynch & Co.; and Jay R. Ritter, an IPO market expert and a finance professor at the University of Florida.

Ritter praised some of NASD's reform ideas but said they didn't go far enough to address the "economic incentives" for Wall Street to abuse IPOs. For example, he said, a brokerage would continue to have an incentive to award shares in coveted new stocks to clients who generate the most trading commissions for the brokerage.

NASD officials said the proposals issued Monday complemented changes the group recommended to the Securities and Exchange Commission last year, including a ban on "spinning," a practice whereby brokerages gave IPO shares to corporate clients in exchange for investment banking business.

NASD Chairman Robert Glauber called the latest reform plan "an important addition to the regulatory initiatives that address abusive and unethical practices" with IPOs.

The proposals issued Monday included:

* A requirement that the lead underwriting brokerage in an IPO deal tell the issuing company how much interest the deal is generating before the offering, and then immediately list for the issuer the investors who got the stock in the IPO sale.

Some brokerages already take these steps, experts said.

Getting a list of the IPO investors could "raise the consciousness of issuers that 'these are [your] shareholders,' " said Kathleen Smith, a principal at Greenwich, Conn.-based Renaissance Capital, an investment firm specializing in new stocks.

In theory, a listing also could put more pressure on brokerages to direct IPOs to investors who expect to be long-term holders, some experts said.

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