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Rule to Take Effect on How Firms Handle IPOs

The change by NASD could make it easier for investment bankers and brokers to make a profit from hot new stocks.

March 23, 2004|From Associated Press

A rule change taking effect today for how securities firms handle hot new stocks could make it easier in some cases for investment bankers and brokers to make a profit from the initial public offering.

The change by the National Assn. of Securities Dealers, the industry's self-policing group, provides an exception to a rule banning a firm from selling IPO shares to outside accounts in which so-called restricted investors -- employees of the firm or immediate family members -- have an ownership interest.

The NASD tightened the existing rule by making it apply to all IPOs and not simply those that get oversubscribed. The exception allows outside accounts to participate in an IPO if the restricted individuals don't total more than 10% ownership in the account.

With the exception, an investment banker who helps determine who receives shares in coveted IPOs may now give shares to a hedge fund or other investment account in which he owns up to 10%, and therefore make a profit from the shares.

NASD officials rejected suggestions that the change conflicts with a regulatory crackdown on Wall Street, where abuses in firms' distribution of hot IPO shares during the tech-stock boom of the late 1990s ultimately led to a series of enforcement actions.

"We just wanted an across-the-board rule," Marc Menchel, general counsel in the NASD's regulatory policy division, said Monday. "It's not intended to be a liberalization. It's intended to be a clarification."

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