New rules to level investor playing field

US regulators are keen on boosting investor confidence

By David Schepp BBC News Online North America business reporter

In the latest effort to introduce sweeping reforms on Wall Street, a leading US stock-market regulator has proposed new rules that would level the playing field between small and large investors.

It is critical that investors have confidence in the integrity of the IPO process

Robert Glauber
NASD chairman

The new regulations, developed by NASD, formerly known as the National Association of Securities Dealers, target first-time offerings of company stock, which - in the US - are called initial public offerings, or IPOs.

It is the latest in a string of proposals by securities regulators to boost confidence among individual, or retail, investors.

"These proposed rules will clearly identify unacceptable conduct associated with IPO allocation and distribution," said Robert Glauber, chief executive at NASD, criticising the tendency of brokerages to favour large, institutional investors over smaller ones.

"It is critical that investors have confidence in the integrity of the IPO process," Mr Glauber said in his written statement.

"Flipping"

Among the new rules, unveiled on Sunday, is one that would seek to apply fees associated with a practice known as "flipping" more equitably.

Proposed bans

"Excessive compensation" for IPO shares

Set asides for IPO investors who agree to buy more

Allocation of shares for executives in return for future broker business

Fees assessed on small investors but not large ones

Under current regulations, brokerages often penalise small investors for flipping - immediately reselling - their IPO shares while not imposing those penalties on large, institutional investors.

Small investors who resell their newly floated shares within 30 days often face penalties, even though it may be to their advantage to do so as the shares may have risen sharply in value.

Under the new NASD rules, investment banks would have to impose fees on both small and large investors, or none on either.

"Spinning" and "laddering"

In addition, NASD, itself regulated by the Securities and Exchange Commission (SEC), is simplifying its rules on a several other practices employed by investment banks including one called "spinning".

Such a scheme involves the brokerage setting aside IPO shares for the floating firm's executives on the condition they funnel investment banking business back to the brokerage, a custom NASD seeks to ban.

Software maker LeapFrog is the latest Nasdaq IPO

To enforce the new ruling, any lead underwriter, the brokerage that oversees the sale of most of the IPO shares, must disclose the number of shares set aside for executives at the soon-to-be-public company.

The regulations also seek to clarify rules surrounding so-called aftermarket tie-in agreements.

The NASD already prohibits such arrangements, also known as "laddering", but seeks to clarify the agency's position on the practice of assigning shares based on a promise to buy additional IPO shares after they begin trading.

Allocation of new stock to investors who have already agreed to buy more shares after they begin trading can drive prices higher.

NASD's proposed rules also seek to end the practice by investment banks of setting aside IPO shares to then be sold for lofty commissions, what NASD refers to as "quid pro quo" agreements.

Regulators are now seeking public comment on the proposals, which are expected to take effect later in the year.