September 1, 2002
By Alex McGrath
Registered Rep.

In the heady days when startups were hotter than a Palm Springs parking lot in August, you could hardly turn around without tripping over an IPO. And all that money made some Wall Streeters lose their ethical footing, engaging in a variety of questionable practices.

Last month, the NASD approved a set of proposed regulations that, if approved by the SEC, would level the playing field. Many of the proposals simply reinforce existing prohibitions – for example, a bar on quid pro quo arrangements whereby an underwriter grants special access to a new equity issue in return for favorable treatment.

But the rule to be of greatest interest to brokers is a proposed ban on “flipping,” whereby favored clients are allowed to get in early on an IPO and sell quickly for a big profit. This happens while the average rep is strongly encouraged to keep their clients in the new stock for a designated period, say, 30 days. “It does the company no good to float the issue and have the things changing hands,” said one broker, who asked to remain anonymous. “It’s well known that they do not want you flipping. By law, you cannot require someone not to sell something, [but] if you’re going to flip it, you’re not going to get any more shares.”

The NASD is currently investigating whether Salomon Smith Barney engaged in this practice.

With half the country owning stock in some way, questionable practices undermine investor confidence, which is trouble for brokers, who bear the brunt of that cost. “These proposals make perfect sense – the path to restoring confidence is creating a level playing field,” says Richard Joyner of Ernst & Young in Dallas, also co-president of IMCA.

Some believe, alas, that this should have happened long ago. “This [spinning] has always been a problem,” says Lawrence Klayman, an attorney at Klayman & Toskes in Boca Raton, Fla., who represents investor claims against broker/dealers.

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