IPO Allocation Abuse Rules

Bill Sjostrom —  13 February 2006

A recent W$J article entitled “Can Bankers Resist the Temptation?� notes that the IPO market is heating up and wonders whether underwriters can resist the temptation of allocating hot IPOs to hedge funds for flipping. Hedge funds now account for as much as a third of IPO allocations and “an increasing chunk of Wall Street’s overall revenue.� According to the article “if the new-issue market remains hot, hedge fund will no doubt start pressing their bankers for ways to bend [IPO allocation] rules to their advantage.� This is nothing new, as many hedge funds pushed the envelope and beyond in trading mutual fund shares.

The SEC did approve NASD Rule 2790 in October 2003 to tighten up restrictions on the allocation of hot IPOs. The NASD, NYSE and SEC also proposed some additional rules in 2003 and 2004 to address other IPO allocation abuses from the dot-com era such as spinning and laddering (see here and here). From what I can tell, however, the SEC has never adopted these rules.  Did they die with Donaldson’s resignation?