Federal Register / Vol. 75, No. 192 / Tuesday, October 5, 2010 / Notices 61541 

8 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 50896 

(Dec. 20, 2004), 69 FR 77804 (Dec. 28, 2004). 

4See Securities Exchange Act Release No. 61690 

(March 11, 2010), 75 FR 13176 (March 18, 2010) 

(‘‘Amendment No. 3’’). 

5See Letter from Jeffrey W. Rubin, Chair, 

Committee on Federal Regulation of Securities, 

Business Law Section, American Bar Association 

(‘‘ABA’’), to Elizabeth M. Murphy, Secretary, SEC, 

dated April 6, 2010; Letter from Sean Davy, 

Managing Director, Corporate Credit Markets 

Division, Securities Industry Financial Markets 

Association (‘‘SIFMA’’), to Elizabeth M. Murphy, 

Secretary, SEC, dated April 8, 2010; and Letter from 

Ross M. Langill, Chairman & CEO, Regal Bay 

Investment Group LLC (‘‘Regal’’), to Elizabeth M. 

Murphy, Secretary, SEC, dated April 8, 2010. 

6These criteria are based on quantitative initial 

listing standards for a national securities exchange, 

which FINRA believes is a suitable proxy for the 

types of companies that are likely to be targeted by 

members for investment banking services. In this 

case, FINRA has determined that the applicable 

standards should be no less than those required for 

initial listing on the NASDAQ Global Market. 

FINRA further believes that, in modifying the scope 

of companies covered by the spinning provisions, 

it is unnecessary to create a de minimis standard 

for investment banking services compensation as 

urged by ABA. Moreover, FINRA also believes that 

a de minimis standard would pose additional 

compliance burdens and would be susceptible to 

abuse by those seeking to avoid application of the 

proposed rule. 

file number should be included on the 

subject line if e-mail is used. 

To help the Commission process and 

review your comments more efficiently, 

please use only one method. The 

Commission will post all comments on 

the Commission’s Internet Web site 

(http://www.sec.gov/rules/sro.shtml). 

Copies of the submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for website viewing and 

printing in the Commission’s Public 

Reference Room on official business 

days between the hours of 10 a.m. and 

3 p.m. Copies of such filing also will be 

available for inspection and copying at 

the principal offices of the Exchange. 

All comments received will be posted 

without change; the Commission does 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. 

All submissions should refer to File 

Number SR–NASDAQ–2010–121, and 

should be submitted on or before 

October 26, 2010. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.8

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. 2010–24897 Filed 10–4–10; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–63010; File No. SR–NASD– 

2003–140] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Notice of Filing of 

Amendment No. 4 and Order Granting 

Accelerated Approval of a Proposed 

Rule Change, as Modified by 

Amendment Nos. 1 Through 4, 

Relating to the Prohibition of Certain 

Abuses in the Allocation and 

Distribution of Shares in Initial Public 

Offerings (‘‘IPOs’’) 

September 29, 2010. 

I. Introduction 

On September 15, 2003, the National 

Association of Securities Dealers, Inc. 

(‘‘NASD’’) (n/k/a the Financial Industry 

Regulatory Authority, Inc. (‘‘FINRA’’)) 

filed with the Securities and Exchange 

Commission (‘‘SEC’’ or ‘‘Commission’’), 

pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a 

proposed rule change to adopt new 

FINRA Rule 5131 (originally proposed 

as NASD Rule 2712) to further and more 

specifically prohibit certain abuses in 

the allocation and distribution of shares 

in initial public offerings (‘‘IPOs’’). 

NASD amended the proposed rule 

change on December 9, 2003 and August 

4, 2004. On February 10, 2010, FINRA 

filed with the Commission Amendment 

No. 3 to SR–NASD–2003–140.3 The 

Commission published the proposed 

rule change, as modified by Amendment 

No. 3, for comment in the Federal 

Register on March 18, 2010.4 The 

Commission received three comment 

letters in response to the proposed rule 

change.5 On July 30, 2010, FINRA 

responded to the comment letters and 

filed Amendment No. 4 to the proposed 

rule change. The Commission is 

publishing this notice and order to 

solicit comments on Amendment No. 4, 

and to approve the proposed rule 

change, as modified by Amendment 

Nos. 1 through 4, on an accelerated 

basis. 

II. Description of Proposal 

a. Quid Pro Quo Allocations 

Proposed FINRA Rule 5131(a) would 

prohibit any member or person 

associated with a member from offering 

or threatening to withhold shares it 

allocates of a new issue as consideration 

or inducement for the receipt of 

compensation that is excessive in 

relation to the services provided by the 

member. 

b. Prohibition on Spinning 

Proposed FINRA Rule 5131(b) would 

prohibit the allocation of new issue 

shares to the account of an executive 

officer or director of a company (1) if the 

company is currently an investment 

banking services client of the member or 

the member has received compensation 

from the company for investment 

banking services in the past 12 months; 

(2) if the member intends to provide, or 

expects to be retained by the company 

for, investment banking services within 

the next 3 months; or (3) on the express 

or implied condition that such 

executive officer or director, on behalf 

of the company, will retain the member 

for the performance of future investment 

banking services. 

FINRA also proposes that members 

establish, maintain and enforce policies 

and procedures reasonably designed to 

ensure that investment banking 

personnel have no involvement or 

influence, directly or indirectly, in the 

new issue allocation decisions of the 

member. The spinning provision would 

apply to any account in which an 

executive officer or director of a public 

company or a ‘‘covered non-public 

company,’’ or a person materially 

supported by such executive officer or 

director, has a beneficial interest. The 

term ‘‘covered non-public company’’ 

would mean any non-public company 

satisfying the following criteria: (i) 

Income of at least $1 million in the last 

fiscal year or in two of the last three 

fiscal years and shareholders’ equity of 

at least $15 million; (ii) shareholders’ 

equity of at least $30 million and a twoyear operating history; or (iii) total 

assets and total revenue of at least $75 

million in the latest fiscal year or in two 

of the last three fiscal years.6 FINRA 

also proposes to prohibit new issue 

allocations only where the person 

responsible for making the allocation 

decision ‘‘knows or has reason to know 

that the member intends to provide, or 

expects to be retained by the company 

for, investment banking services within 

the next 3 months.’’ 

In addition, to facilitate compliance 

with the spinning provisions as 

requested by commenters, proposed 

new Supplementary Material .02 would 

expressly permit members to rely on 

written representations obtained within 

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61542 Federal Register / Vol. 75, No. 192 / Tuesday, October 5, 2010 / Notices 

7One commenter asked that hedge funds clearly 

be included in the proposal. See Regal. FINRA 

notes that hedge funds would be included where 

the beneficial interest of executive officers and 

directors of a particular company (and materially 

supported persons) in the aggregate exceed 25%. 

FINRA continues to believe that the 25% threshold 

is most appropriate and therefore will not increase 

the standard to 50% as requested by one 

commenter. See ABA. 

8FINRA Rule 5130(i)(1) defines ‘‘beneficial 

interest’’ to mean any economic interest, such as the 

right to share in gains or losses. The receipt of a 

management or performance based fee for operating 

a collective investment account, or other fees for 

acting in a fiduciary capacity, shall not be 

considered a beneficial interest in the account. 

the prior 12 months from the beneficial 

owner(s) of the account (or a person 

authorized to represent the beneficial 

owner(s)) as to whether such beneficial 

owner(s) is an executive officer or 

director (or person materially supported 

by an executive officer or director) and 

if so, the company(ies) on whose behalf 

such executive officer or director serves. 

FINRA requires that the initial 

representation be an affirmative 

representation, but will permit such 

representation to be updated annually 

through the use of negative consent 

letters. Finally, a member would be 

required to maintain a copy of all 

records and information relating to 

whether an account is eligible to receive 

an allocation of the new issue for at 

least three years following the member’s 

allocation to that account. 

FINRA also proposes to include a 

limitation in the spinning rule 

providing that the spinning prohibitions 

would not apply to allocations made to 

any account described in FINRA Rule 

5130(c)(1) through (3) and (5) through 

(10), or to any other account in which 

the beneficial interests of executive 

officers and directors of the company 

and persons materially supported by 

such executive officers and directors in 

the aggregate do not exceed 25% of such 

account.7 FINRA also proposes to add a 

new definition of ‘‘beneficial interest,’’ 

which would have the same meaning as 

FINRA Rule 5130.8

FINRA proposes to use the term ‘‘new 

issue’’ throughout the proposed rule and 

to use the same definition provided in 

FINRA Rule 5130(i)(9). Thus, the 

proposed rule, as amended, would 

apply to ‘‘new issues,’’ meaning ‘‘any 

initial public offering of an equity 

security as defined in Section 3(a)(11) of 

the Act, made pursuant to a registration 

statement or offering circular.’’ As such, 

the proposed definition of ‘‘new issue’’ 

would exclude: 

• Offerings made pursuant to an 

exemption under Section 4(1), 4(2) or 

4(6) of the Securities Act of 1933 

(‘‘Securities Act’’), or Securities Act Rule 

504 if the securities are ‘‘restricted 

securities’’ under Securities Act Rule 

144(a)(3), or Rule 144A or Rule 505 or 

Rule 506 adopted thereunder; 

• Offerings of exempted securities as 

defined in Section 3(a)(12) of the Act, 

and rules promulgated thereunder; 

• Offerings of securities of a 

commodity pool operated by a 

commodity pool operator as defined 

under Section 1a(5) of the Commodity 

Exchange Act; 

• Rights offerings, exchange offers, or 

offerings made pursuant to a merger or 

acquisition; 

• Offerings of investment grade assetbacked securities; 

• Offerings of convertible securities; 

• Offerings of preferred securities; 

• Offerings of an investment company 

registered under the Investment 

Company Act of 1940 (‘‘Investment 

Company Act’’); 

• Offerings of securities (in ordinary 

share form or ADRs registered on Form 

F–6) that have a pre-existing market 

outside of the United States; and 

• Offerings of a business development 

company as defined in Section 2(a)(48) 

of the Investment Company Act, a direct 

participation program as defined in Rule 

2310(a) or a real estate investment trust 

as defined in Section 856 of the Internal 

Revenue Code. 

c. Policies Concerning Flipping 

Proposed FINRA Rule 5131(c)(1) 

would prohibit members or persons 

associated with a member from directly 

or indirectly recouping, or attempting to 

recoup, any portion of a commission or 

credit paid or awarded to an associated 

person for selling shares of a new issue 

that are subsequently flipped by a 

customer, unless the managing 

underwriter has assessed a penalty bid 

on the entire syndicate. Moreover, 

proposed FINRA Rule 5131(c)(2) would 

require, in addition to any obligation to 

maintain records relating to penalty bids 

under SEA Rule 17a–2(c)(1), that 

members promptly record and maintain 

information regarding any penalties or 

disincentives assessed on its associated 

persons in connection with a penalty 

bid. 

d. IPO Pricing and Trading Practices 

(1) Indications of Interest 

Proposed FINRA Rule 5131(d)(1) 

would require, in a new issue, the bookrunning lead manager to provide to the 

issuer’s pricing committee (or, if the 

issuer has no pricing committee, its 

board of directors): (1) A regular report 

of indications of interest, including the 

names of interested institutional 

investors and the number of shares 

indicated by each, as reflected in the 

book-running lead manager’s book of 

potential institutional orders, and a 

report of aggregate demand from retail 

investors; and (2) after the settlement 

date of the new issue, a report of the 

final allocation of shares to institutional 

investors as reflected in the books and 

records of the book-running lead 

manager including the names of 

purchasers and the number of shares 

purchased by each, and aggregate sales 

to retail investors. 

(2) Lock-Up Agreements 

Proposed FINRA Rule 5131(d)(2) 

would require that any lock-up 

agreement or other restriction on the 

transfer of the issuer’s shares by officers 

and directors of the issuer entered into 

in connection with a new issue must 

provide that such restrictions will apply 

to their issuer-directed shares. It also 

must provide that, at least two business 

days before the release or waiver of any 

lock-up or other restriction on the 

transfer of the issuer’s shares, the bookrunning lead manager will notify the 

issuer of the impending release or 

waiver and announce the impending 

release or waiver through a major news 

service. The exceptions to this 

notification requirement are where the 

release or waiver is effected solely to 

permit a transfer of securities that is not 

for consideration and where the 

transferee has agreed in writing to be 

bound by the same lock-up agreement 

terms in place for the transferor. 

FINRA also is proposing new 

Supplementary Material .03 to provide 

that the required announcement also 

may be made by another member or the 

issuer (although it remains the 

responsibility of the book-running lead 

manager to ensure that the impending 

release or waiver is properly announced 

in compliance with this Rule). 

(3) Returned Shares 

Proposed FINRA Rule 5131(d)(3) 

would require that the agreement 

between the book-running lead manager 

and other syndicate members must 

require, to the extent not inconsistent 

with SEC Regulation M, that any shares 

trading at a premium to the public 

offering price that are returned by a 

purchaser to a syndicate member after 

secondary market trading commences be 

used to offset the existing syndicate 

short position. If no syndicate short 

position exists, proposed FINRA Rule 

5131(d)(3)(B) would require the member 

to either: (1) Offer returned shares at the 

public offering price to unfilled 

customers’ orders pursuant to a random 

allocation methodology; or (2) sell 

returned shares on the secondary market 

and donate profits from the sale to an 

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Federal Register / Vol. 75, No. 192 / Tuesday, October 5, 2010 / Notices 61543 

9Proposed FINRA Rule 5131(e)(9) defines 

‘‘unaffiliated charatable organization’’ as a taxexempt entity organized under Section 501(c)(3) of 

the Internal Revenue Code that is not affiliated with 

the member and for which no executive officer or 

director of the member, or person materially 

supported by such executive officer or director, is 

an individual listed or required to be listed on Part 

VII of the Internal Revenue Service Form 990 (i.e., 

officers, directors, trustees, key employees, highest 

compensated employees and certain independent 

contractors). 

10See SIFMA. 

11See ABA and SIFMA. 

12See SIFMA. 

‘‘unaffiliated charitable organization’’ 

with the condition that the donation be 

treated as an anonymous donation to 

avoid any reputational benefit to the 

member. Proposed FINRA Rule 5131 

would establish a new definition of 

‘‘unaffiliated charitable organization’’ to 

prevent such charitable donations from 

benefiting the member or executive 

officers and directors of the member 

(and persons they materially support).9

The definition of ‘‘unaffiliated charitable 

organization’’ is closely tied to specific 

information charities are required to file 

with the Internal Revenue Service. 

(4) Market Orders 

Proposed FINRA Rule 5131(d)(4) 

would require that no member may 

accept a market order for the purchase 

of shares of a new issue in the 

secondary market prior to the 

commencement of trading of such 

shares in the secondary market. 

e. Definitions 

Proposed FINRA Rule 5131(d) would 

provide the following definitions. The 

term ‘‘public company’’ would mean any 

company that is registered under 

Section 12 of the Exchange Act or files 

periodic reports pursuant to Section 

15(d) thereof. The term ‘‘beneficial 

interest’’ would have the same meaning 

as defined in FINRA Rule 5130(i)(1). 

The term ‘‘covered security’’ would 

mean any non-public company 

satisfying the following criteria: (i) 

Income of at least $1 million in the last 

fiscal year or in two of the last three 

fiscal years and shareholders’ equity of 

at least $15 million; (ii) shareholders’ 

equity of at least $30 million and a twoyear operating history; or (iii) total 

assets and total revenue of at least $75 

million in the latest fiscal year or in two 

of the last three fiscal years. The term 

‘‘flipped’’ would mean the initial sale of 

new issue shares purchased in an 

offering within 30 days following the 

offering date of such offering. 

In addition, proposed FINRA Rule 

5131(d) would define the term 

‘‘investment banking services’’ to 

include, without limitation, acting as an 

underwriter, participating in a selling 

group in an offering for an issuer or 

otherwise acting in furtherance of a 

public offering of the issuer; acting as a 

financial adviser in a merger, 

acquisition or other corporate 

reorganization; providing venture 

capital, equity lines of credit, private 

investment, public equity transactions 

(PIPEs) or similar investments or 

otherwise acting in furtherance of a 

private offering of the issuer; or serving 

as placement agent for the issuer. Under 

the proposed rule, the term ‘‘material 

support’’ would mean directly or 

indirectly providing more than 25% of 

a person’s income in the prior calendar 

year. Persons living in the same 

household are deemed to be providing 

each other with material support. The 

term ‘‘new issue’’ would have the same 

meaning as in Rule 5130(i)(9). In 

addition, the term ‘‘penalty bid’’ would 

mean an arrangement that permits the 

managing underwriter to reclaim a 

selling concession from a syndicate 

member in connection with an offering 

when the securities originally sold by 

the syndicate member are purchased in 

syndicate covering transactions. The 

term ‘‘unaffiliated charitable 

organization’’ would mean a tax-exempt 

entity organized under Section 501(c)(3) 

of the Internal Revenue Code that is not 

affiliated with the member and for 

which no executive officer or director of 

the member, or person materially 

supported by such executive officer or 

director, is an individual listed or 

required to be listed on Part VII of the 

Internal Revenue Service Form 990 (i.e., 

officers, directors, trustees, key 

employees, highest compensated 

employees and certain independent 

contractors). 

Supplementary Material 

Proposed FINRA Rule 5131 would 

also include supplementary material 

regarding issuer directed allocations, in 

paragraph .01, which would provide 

that the prohibitions of paragraph (b) of 

the rule would not apply to securities 

that are directed in writing by the 

issuer, its affiliates, or selling 

shareholders, so long as the member has 

no involvement or influence, directly or 

indirectly, in the allocation decisions of 

the issuer, its affiliates, or selling 

shareholders with respect to such 

issuer-directed shares. Proposed FINRA 

Rule 5131 would also provide 

supplementary material regarding 

annual representation, in paragraph .02, 

which would provide that for purposes 

of paragraph (b) of the rule, a member 

may rely on a written representation 

obtained within the prior 12 months 

within the parameters set forth in 

paragraph .02. The proposed rule would 

also provide supplementary material 

regarding lock-up announcements, in 

paragraph .03, stating that the 

requirement that the book-running lead 

manager announce the impending 

release or waiver of a lock-up or other 

restriction on the transfer of the issuer’s 

shares shall be deemed satisfied where 

such announcement is made by the 

book-running manager, another member 

or the issuer, so long as such 

announcement otherwise complies with 

the requirements of paragraph (d)(2) of 

Rule 5131. 

The text of the proposed rule change 

is available on FINRA’s Web site at 

http://www.finra.org, at the principal 

office of FINRA, and at the 

Commission’s Public Reference Room. 

III. Summary of Comments and 

Amendment No. 4 

Prohibition on Spinning 

Proposed FINRA Rule 5131(b) would 

prohibit the allocation of IPO shares to 

the account of an executive officer or 

director of a company (1) if the 

company is currently an investment 

banking services client of the member or 

the member has received compensation 

from the company for investment 

banking services in the past 12 months; 

(2) if the member intends to provide, or 

expects to be retained by the company 

for, investment banking services within 

the next 3 months; or (3) on the express 

or implied condition that such 

executive officer or director, on behalf 

of the company, will retain the member 

for the performance of future investment 

banking services. 

Commenters generally supported the 

proposed changes to the spinning rule 

but requested additional 

modifications.10 Commenters’ concerns 

included that it would be difficult to 

identify the universe of officers and 

directors subject to the rule and asked 

that members be permitted to rely on 

annual negative consent letters.11 One 

commenter expressed particular 

concern regarding the applicability of 

the rule to officers and directors of nonpublic companies.12

In response to commenters’ concerns, 

FINRA is proposing several changes to 

the spinning provisions. First, FINRA 

proposes that members establish, 

maintain and enforce policies and 

procedures reasonably designed to 

ensure that investment banking 

personnel have no involvement or 

influence, directly or indirectly, in the 

new issue allocation decisions of the 

member. FINRA believes that such 

procedures are essential to managing 

conflicts of interest between investment 

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61544 Federal Register / Vol. 75, No. 192 / Tuesday, October 5, 2010 / Notices 

13These criteria are based on quantitative initial 

listing standards for a national securities exchange, 

which FINRA believes is a suitable proxy for the 

types of companies that are likely to be targeted by 

members for investment banking services. In this 

case, FINRA has determined that the applicable 

standards should be no less than those required for 

initial listing on the NASDAQ Global Market. 

FINRA further believes that, in modifying the scope 

of companies covered by the spinning provisions, 

it is unnecessary to create a de minimis standard 

for investment banking services compensation as 

urged by ABA. Moreover, FINRA believe that a de 

minimis standard would pose additional 

compliance burdens and would be susceptible to 

abuse by those seeking to avoid application of the 

proposed rule. 

14See SIFMA. 

15 If an executive officer or director receives an 

allocation and the investment bank subsequently is 

retained for the performance of investment banking 

services within the three month window by such 

executive officer or director’s employing firm, 

FINRA will investigate the particular information 

about the business relationship that was known 

(and by whom) at the time of the allocation, 

including a review of the communications between 

the broker-dealer and the investment banking 

client, and between the investment banking and 

syndicate departments, as well as the member’s 

systems for logging and managing prospective and 

current client and transaction information. 

16FINRA notes that the Voluntary Initiative more 

broadly prohibited allocations to the account of any 

executive officer or director of a U.S. public 

company or a public company for which a U.S. 

market is the principal equity trading market with 

respect to all hot IPOs. Voluntary Initiative 

Regarding Allocations of Securities in ‘‘Hot’’ Initial 

Public Offerings to Corporate Executives and 

Directors, http://www.sec.gov/news/press/ 

globalvolinit.htm (Apr. 28, 2003). 

17See ABA. Commenters generally favored the 

use of defined terms in proposed FINRA Rule 5131 

that are consistent with the terms used in Rule 

5130. See ABA and Regal. 

18See ABA. 

19See ABA. 

banking and syndicate activities. FINRA 

understands that these procedures are 

customary at members today, and wants 

to ensure that such policies and 

procedures remain in force. 

In addition, in response to comments, 

FINRA proposes to narrow the scope of 

the non-public companies covered by 

the spinning provision to focus the rule 

and firms’ compliance efforts on those 

allocations that have the greatest 

potential for abuse. Specifically, the 

spinning provision would apply to any 

account in which an executive officer or 

director of a public company or a 

‘‘covered non-public company,’’ or a 

person materially supported by such 

executive officer or director, has a 

beneficial interest. The term ‘‘covered 

non-public company’’ means any nonpublic company satisfying the following 

criteria: (i) Income of at least $1 million 

in the last fiscal year or in two of the 

last three fiscal years and shareholders’ 

equity of at least $15 million; (ii) 

shareholders’ equity of at least $30 

million and a two-year operating 

history; or (iii) total assets and total 

revenue of at least $75 million in the 

latest fiscal year or in two of the last 

three fiscal years.13

One commenter stated that it may be 

difficult to determine when the member 

‘‘intends to provide’’ investment banking 

services and asked that the member be 

permitted to rely on policies and 

procedures reasonably designed to 

determine whether an entity is a current 

or prospective investment banking 

client, or whether the member intends 

to provide investment banking services 

to a prospective client, on the basis of 

reasonable criteria (which criteria may 

limit the identification of current clients 

to those relationships that are more than 

aspirational or passing, or for which the 

firm has a reasonable expectation of an 

active near-term relationship).14 FINRA 

does not believe that the spinning 

provision should be recast solely as a 

‘‘policies and procedures’’ rule. 

However, in response to commenters’ 

concerns and in light of the provision 

explicitly requiring policies and 

procedures excluding investment 

banking personnel input into new issue 

allocation decisions, FINRA proposes to 

modify the three month forward looking 

provision to prohibit new issue 

allocations only where the person 

responsible for making the allocation 

decision ‘‘knows or has reason to know 

that the member intends to provide, or 

expects to be retained by the company 

for, investment banking services within 

the next 3 months.’’ FINRA believes that 

this change strikes an appropriate 

balance in addressing the potential that 

new issue allocations will influence 

future business with the member while 

not unnecessarily impacting the capital 

formation process.15 However, 

according to FINRA, if a member 

maintains effective information barriers 

between the investment banking and 

syndicate departments and the persons 

responsible for making new issue 

allocation decisions neither know nor 

have reason to know of the prospective 

business relationship, the forwardlooking provision will not be violated. 

To facilitate compliance with the 

spinning provisions as requested by 

commenters, proposed new 

Supplementary Material .02 expressly 

permits members to rely on written 

representations obtained within the 

prior 12 months from the beneficial 

owner(s) of the account (or a person 

authorized to represent the beneficial 

owner(s)) as to whether such beneficial 

owner(s) is an executive officer or 

director (or person materially supported 

by an executive officer or director) and 

if so, the company(ies) on whose behalf 

such executive officer or director serves. 

Consistent with current practice under 

FINRA Rule 5130, FINRA requires that 

the initial representation be an 

affirmative representation, but will 

permit such representation to be 

updated annually through the use of 

negative consent letters. Members are 

reminded that a member may not rely 

upon any representation it believes, or 

has reason to believe, is inaccurate. 

Finally, a member would be required to 

maintain a copy of all records and 

information relating to whether an 

account is eligible to receive an 

allocation of the new issue for at least 

three years following the member’s 

allocation to that account. 

FINRA notes that members should 

understand that the representation in 

the spinning context differs from that in 

FINRA Rule 5130 because, in the 

spinning case, the information obtained 

from the customer is not, by itself, 

sufficient to make a determination of 

whether a customer is eligible to 

purchase a new issue. Members also 

must determine whether each account 

considered for a new issue allocation 

involves an executive officer or director 

(or materially supported person) of a 

current or prospective client that falls 

within the scope of paragraph (b). 

Members may choose to adopt a more 

restrictive internal policy prohibiting 

allocations to all executive officers, 

directors and materially supported 

persons; however, FINRA notes that this 

is not required under the proposed rule 

change.16

Commenters also asked that the 

definition of ‘‘account of an executive 

officer or director’’ be amended to apply 

to accounts in which an executive 

officer, director or materially supported 

person has a ‘‘beneficial interest’’ rather 

than a ‘‘financial interest.’’ 17

Commenters asked that the rule exclude 

accounts over which executive officers, 

directors or materially supported 

persons have ‘‘discretion or control’’ as 

this may unduly impact allocations to 

certain funds.18 Commenters further 

argued that the definition of ‘‘account of 

an executive officer or director’’ should 

be modified to exclude certain other 

entities (such as foreign investment 

companies) consistent with FINRA Rule 

5130(c).19

In response to comments, FINRA 

proposes to delete the definition of 

‘‘account of an executive officer or 

director’’ and to instead include a new 

limitation in the spinning rule 

providing that the spinning prohibitions 

would not apply to allocations made to 

any account described in FINRA Rule 

5130(c)(1) through (3) and (5) through 

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Federal Register / Vol. 75, No. 192 / Tuesday, October 5, 2010 / Notices 61545 

20One commenter asked that hedge funds clearly 

be included in the proposal. See Regal. FINRA 

notes that hedge funds would be included where 

the beneficial interest of executive officers and 

directors of a particular company (and materially 

supported persons) in the aggregate exceed 25%. 

FINRA continues to believe that the 25% threshold 

is most appropriate and therefore will not increase 

the standard to 50% as requested by one 

commenter. See ABA. 

21FINRA Rule 5130(i)(1) defines ‘‘beneficial 

interest’’ to mean any economic interest, such as the 

right to share in gains or losses. FINRA notes that 

the receipt of a management or performance based 

fee for operating a collective investment account, or 

other fees for acting in a fiduciary capacity, shall 

not be considered a beneficial interest in the 

account. 

22See ABA. 

23While earlier proposed versions of the IPO Rule 

would have applied only to ‘‘hot issues,’’ FINRA, 

then NASD, revised the proposal to cover the 

purchase and sale of all initial equity public 

offerings, not just those that open above a 

designated premium, because FINRA believed the 

revised approach would be easier to understand 

and would avoid many of the complexities 

associated with the cancellation provision. See 

Securities Exchange Act Release No. 48701 (October 

24, 2003), 68 FR 62126 (October 31, 2003) (Order 

Approving File No. SR–NASD–99–60). (Proposed 

rule change relating to restrictions on the purchases 

and sales of initial public offerings of equity 

securities). 

24See SIFMA. 

25See SIFMA. 

26Proposed Rule 5131(d)(2), as amended, 

provides that ‘‘[a]ny lock-up agreement or other 

restriction on the transfer of the issuer’s shares by 

officers and directors of the issuer entered into in 

connection with a new issue shall provide that 

***’’ (new language emphasized). 

27See SIFMA. 

28See SIFMA. 

29SIFMA also asked FINRA to clarify that 

anonymous, ordinary course sales on a national 

securities exchange or ATS at market prices will be 

considered a ‘‘random allocation’’ for the purposes 

of the rule. FINRA disagrees. The provision, as 

previously proposed would have required that, 

where no syndicate short position exists, the 

member must offer the returned shares to unfilled 

customer orders at the public offering price, not the 

market price. Moreover, FINRA notes that, if the 

shares are trading at a premium to the public 

offering price, then sales by the member at market 

prices would result in the premium inuring to the 

benefit of the member, which is inconsistent with 

the purpose of the provision and a member’s 

obligations under FINRA Rule 5130. 

30One commenter asked for confirmation that the 

appropriate time for determining whether returned 

shares are trading at a premium to their IPO price 

is at the time such securities are returned. FINRA 

agrees. See SIFMA. Another commenter argued that 

the requirement that members use a random 

allocation methodology to reallocate returned 

shares was inadequate. See Regal. FINRA disagrees 

and notes that this standard is already used 

successfully in other FINRA rules. See FINRA Rule 

2360 (Allocation of Exercise Assignment Notices). 

(10), or to any other account in which 

the beneficial interests of executive 

officers and directors of the company 

and persons materially supported by 

such executive officers and directors in 

the aggregate do not exceed 25% of such 

account.20 As requested by commenters, 

FINRA also proposes to add a new 

definition of ‘‘beneficial interest,’’ which 

will have the same meaning as FINRA 

Rule 5130.21 FINRA believes deleting 

the term ‘‘account of an executive officer 

or director’’ and modifying the scope of 

the rule to generally exclude those 

accounts excepted from FINRA Rule 

5130(c) is appropriate in that allocations 

to such accounts are not likely to result 

in the type of abuse the spinning 

prohibition is geared toward. FINRA 

believes that the proposal, as amended, 

continues to meet the goals of the rule 

while avoiding an unnecessary impact 

on capital formation. In addition, by 

replacing references to ‘‘financial 

interest’’ with ‘‘beneficial interest’’ and 

deleting the reference to accounts in 

which officers and directors exercise 

‘‘discretion or control,’’ FINRA believes 

that the rule more properly focuses on 

accounts in which relevant parties have 

an economic interest. 

Commenters argued that the spinning 

rule should apply only to ‘‘hot IPOs’’ and 

should exclude the types of offerings 

excepted under FINRA Rule 

5130(i)(9).22 FINRA does not agree that 

the rule should apply only to ‘‘hot IPOs.’’ 

FINRA believes that the proposed rule 

change should not be limited to hot 

IPOs for the same reasons that FINRA 

Rule 5130 is not limited to hot IPOs.23

Specifically, the operation of a rule 

based on an unknown future event—the 

opening price—creates compliance 

difficulties and potentially may 

exacerbate spinning problems and may 

harm capital formation by necessitating 

members to cancel allocations and 

reallocate shares to another customer. 

FINRA does, however, agree that certain 

types of offerings that are not likely to 

trade at a premium in the aftermarket 

should be excluded from the rule. 

Therefore, FINRA proposes to replace 

the defined term ‘‘initial public offering’’ 

or ‘‘IPO’’ with the term ‘‘new issue’’ 

throughout the proposed rule and to use 

the same definition provided in FINRA 

Rule 5130(i)(9). In developing the 

definition of ‘‘new issue’’ in FINRA Rule 

5130, FINRA carefully considered the 

extent to which such offerings may be 

hot issues. Thus, the proposed rule, as 

amended, applies to ‘‘new issues,’’ 

meaning ‘‘any initial public offering of 

an equity security as defined in Section 

3(a)(11) of the Act, made pursuant to a 

registration statement or offering 

circular.’’ 

IPO Pricing and Trading Practices 

Commenters generally supported the 

amended proposal related to IPO Pricing 

and Trading Practices.24 However, one 

commenter asked that FINRA include 

clarifying language that the lock-up 

provision would only apply to lock-ups 

entered into in connection with the IPO, 

and not with respect to other lock-up 

agreements.25 FINRA confirms that this 

provision applies only to lock-up 

agreements entered into in connection 

with a new issue and has modified the 

rule text to reflect this.26 This 

commenter also asked that FINRA 

clarify that the required notice of an 

impending release or waiver of a lockup may be announced either by the 

issuer or the applicable member(s).27

FINRA agrees that, so long as the 

announcement is made through a major 

news service at least two days before the 

release or waiver of any lock-up or other 

restriction on the transfer of the issuer’s 

shares, the requirement is satisfied 

irrespective of whether such 

announcement is made by the bookrunning lead manager, another member 

or by the issuer. Thus, FINRA is 

proposing new Supplementary Material 

.03 in response to comments to provide 

that the required announcement also 

may be made by another member or the 

issuer. However, FINRA notes that it 

remains the responsibility of the bookrunning lead manager to ensure that the 

impending release or waiver is properly 

announced in compliance with this 

Rule. 

One commenter argued that the rule 

should be changed to permit the 

syndicate to retain discretion to either 

use returned shares to reduce the 

syndicate position or toward unfilled 

customer orders.28 FINRA does not 

agree that this change is appropriate. 

FINRA expects that when shares trade at 

a premium to the public offering price, 

the incidence of returned shares should 

be minimal so as not to affect the ability 

of syndicate members to stabilize the 

market for such shares to the extent 

stabilization activities are even 

necessary. Further, FINRA believes that 

the complexity of addressing this 

alternative would unnecessarily 

complicate the proposed rule change.29

However, in response to comments, 

FINRA is amending the rule to provide 

members with additional flexibility in 

the handling of returned shares. The 

amended proposal continues to require 

that, to the extent not inconsistent with 

SEC Regulation M, the agreement 

between the book-running lead manager 

and other syndicate members must 

require that any shares trading at a 

premium to the public offering price 

returned by a purchaser to a syndicate 

member after secondary market trading 

commences be used to offset the 

existing syndicate short position.30

However, where no syndicate short 

position exists, the proposed rule 

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31Proposed FINRA Rule 5131(e)(9) defines 

‘‘unaffiliated charitable organization’’ as a taxexempt entity organized under Section 501(c)(3) of 

the Internal Revenue Code that is not affiliated with 

the member and for which no executive officer or 

director of the member, or person materially 

supported by such executive officer or director, is 

an individual listed or required to be listed on Part 

VII of Internal Revenue Service Form 990 (i.e., 

officers, directors, trustees, key employees, highest 

compensated employees and certain independent 

contractors). 

32See SIFMA. 

33See ABA and SIFMA. 

34See ABA. 

35See ABA. 

36See SIFMA. 

37See Amendment No. 3. 

38See Amendment No. 3. 

39See Regal. 

40See Regal. 

41 In approving this proposed rule change, the 

Commission has considered the proposed rule’s 

impact on efficiency, competition, and capital 

formation. See 15 U.S.C. 78c(f). 

42 15 U.S.C. 78o–3(b)(6). 

change would provide the member with 

the option, provided that it is in 

accordance with SEC Regulation M, to 

either: (1) Offer returned shares at the 

public offering price to unfilled 

customers’ orders pursuant to a random 

allocation methodology or (2) sell 

returned shares on the secondary market 

and donate profits from the sale to an 

‘‘unaffiliated charitable organization’’ 

with the condition that the donation be 

treated as an anonymous donation to 

avoid any reputational benefit to the 

member.31 Proposed FINRA Rule 5131 

establishes a new definition of 

‘‘unaffiliated charitable organization’’ to 

prevent such charitable donations from 

benefiting the member or executive 

officers and directors of the member 

(and persons they materially support). 

FINRA believes that charitable 

donations funded by returned shares 

should not provide any reputational 

benefit to the member. The definition of 

‘‘unaffiliated charitable organization’’ is 

closely tied to specific information 

charities are required to file with the 

Internal Revenue Service. 

The proposed rule change, as 

amended, prohibits the acceptance of 

market orders for the purchase of IPO 

shares prior to the commencement of 

trading on the secondary market. A 

commenter supported the proposed 

amendment but offered alternative rule 

text.32 FINRA favors its existing rule 

text but proposes a slight modification 

in response to comments to further 

clarify the provision such that the 

relevant text will now state that ‘‘no 

member may accept a market order for 

the purchase of shares of a new issue in 

the secondary market prior to the 

commencement of trading of such 

shares in the secondary market.’’ 

Other Issues 

Commenters reiterated certain 

concerns regarding FINRA’s proposed 

provision relating to abusive allocation 

arrangements. Proposed FINRA Rule 

5131(a) prohibits a member from 

offering or threatening to withhold 

shares it allocates in an IPO as 

consideration or inducement for the 

receipt of compensation that is 

excessive in relation to the services 

provided by the member (i.e., quid pro 

quo allocations). Commenters generally 

supported this proposed provision but 

reiterated earlier concerns that the term 

‘‘excessive’’ is subject to uncertainty.33

One commenter requested that FINRA 

clarify that any services provided for a 

‘‘fair price’’ as provided by FINRA’s 

Corporate Financing Rule (Rule 

5110(a)(9)) would not be deemed 

excessive.34 This commenter also 

requested guidance that any services 

provided by a member paid for using 

‘‘soft dollars’’ in conformity with Section 

28(e) of the Act also would not be 

deemed excessive.35 Another 

commenter asked that clarifying 

language be added to the rule to provide 

that an assessment of whether 

compensation is excessive would be 

based on the relevant facts and 

circumstances including, where 

applicable, the level of risk and effort 

involved in the transaction and the rates 

generally charged for such services.36

As stated in Amendment No. 3, 

FINRA agrees that an assessment of 

whether or not compensation is 

excessive would be based upon all of 

the relevant facts and circumstances 

including, where applicable, the level of 

risk and effort involved in the 

transaction and the rates generally 

charged for such services.37 However, 

FINRA continues to believe that the 

proposed language, which refers to 

‘‘compensation that is excessive in 

relation to the services provided,’’ is 

most appropriate in that it affords 

FINRA the necessary flexibility in 

addressing the range of potential quid 

pro quo arrangements that may arise. As 

stated in Amendment No. 3, FINRA 

does not believe it is necessary to 

include rule text stating that an 

assessment of whether compensation is 

‘‘excessive’’ will be based upon all of the 

relevant facts and circumstances.38

Likewise, FINRA does not believe it is 

appropriate to provide blanket guidance 

regarding payments made in conformity 

with Section 28(e) of the Act or FINRA 

Rule 5110(a)(9). 

Finally, one commenter raised 

concerns regarding FINRA’s proposed 

flipping provision.39 This commenter 

argued that, instead of defining the 

flipping period to mean the initial sale 

of new issue shares within 30 days 

following the offering date, the flipping 

provision should be based on the sale of 

shares prior to the book manager lifting 

the penalty bid, making the time period 

under the rule subject to the discretion 

of the managing underwriter.40 FINRA 

does not agree that the suggested 

alternative represents an improvement 

to the proposed provision. FINRA 

believes that the certainty and finality of 

the proposed approach, including the 

30-day window, is the appropriate 

duration for prohibiting members from 

recouping commissions from associated 

persons whose customers sell in cases 

where a penalty bid has not been 

assessed on the entire syndicate. 

FINRA will announce the effective 

date of the proposed rule change in a 

Regulatory Notice to be published no 

later than 60 days following 

Commission approval. The effective 

date will be no less than 90 and no more 

than 180 days following publication of 

the Regulatory Notice announcing 

Commission approval. 

IV. Discussion and Commission 

Findings 

After carefully considering the 

proposal, the comments submitted, and 

FINRA’s response to the comments, the 

Commission finds that the proposed 

rule change, as modified by Amendment 

Nos. 1 through 4, is consistent with the 

requirements of the Act and the rules 

and regulations thereunder applicable to 

a national securities association.41 In 

particular, the Commission finds that 

the proposed rule change, as amended, 

is consistent with Section 15A(b)(6) of 

the Act,42 which requires, among other 

things, that FINRA rules be designed to 

prevent fraudulent and manipulative 

acts and practices, to promote just and 

equitable principles of trade, and, in 

general, to protect investors and the 

public interest. In particular, the 

Commission believes that the proposed 

rule change is a reasonable step to 

enhance members’ avoidance of 

unacceptable conduct when they engage 

in the allocation and distribution of new 

issue shares. The Commission also 

believes that the proposed rule change 

is a reasonable step to enhance public 

confidence in the distribution of new 

issues. 

In addition, the Commission sought 

specific comment in Amendment No. 3 

on whether there are any alternatives to 

the proposed rule change that FINRA 

should consider, such as whether 

proposed Rule 5131(b)’s spinning 

provisions should be modified to 

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Federal Register / Vol. 75, No. 192 / Tuesday, October 5, 2010 / Notices 61547 

43See Regal. 

44See ABA. 

45See id. 

46 15 U.S.C. 78s(b)(2). 

47 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

include a mandatory ban prohibiting 

members from seeking or providing 

investment banking services to a 

company for a period of 12 months 

following any allocation of IPO shares to 

an account of an executive officer or 

director of such company and whether 

such a ban would facilitate compliance. 

One commenter strongly supported a 

12-month prohibition.43 However, 

another commenter opposed such a 

prohibition, saying that it ‘‘would—by 

rule—impose an automatic sanction for 

even inadvertent allocations of IPO 

securities’’ and ‘‘would, in all cases, be 

financially disproportionate to the value 

of the securities involved in any 

violation, would not take into account 

the specific facts of each situation, 

deprive the FINRA member of its 

statutory right to a fair hearing before 

the imposition of any disciplinary 

sanction, and would unfairly deprive 

the company of the right to select the 

services of the FINRA member.’’ 44

According to this commenter, in each 

case, the imposition of a mandatory ban, 

as suggested by the Commission, would 

be an excessive penalty in light of the 

facts and circumstances underlying the 

potential violation of the proposed 

rule.45 Nevertheless, this commenter 

noted that the 12-month prohibition 

‘‘should not in any event be approved 

without an opportunity for review of 

and comment on the text of the 

proposed rule,’’ with commenter 

requesting that the Commission 

republish for comment any proposal to 

adopt such a mandatory ban on 

investment banking services with a 

sixty-day comment period. In light of 

these comments, the Commission will 

continue to consider the commenters’ 

recommendations and concerns in 

considering whether any future action is 

warranted. However, the Commission 

does not believe this issue should 

preclude approval of the proposal. 

V. Accelerated Approval 

The Commission finds good cause, 

pursuant to Section 19(b)(2) of the 

Act,46 for approving the proposed rule 

change, as modified by Amendment 

Nos. 1 through 4 thereto, prior to the 

30th day after the date or publication of 

Amendment No. 4 in the Federal 

Register. The changes proposed in 

Amendment No. 4 respond to specific 

concerns raised. Moreover, accelerating 

approval of this proposal should benefit 

FINRA members by aiding them in 

avoiding misconduct in new issue 

distributions and should benefit 

investors by taking a step to enhance 

investor protection in the capital raising 

process. 

VI. Solicitation of Comments 

Interested persons are invited to 

submit written data, views and 

arguments concerning the foregoing, 

including whether the proposed rule 

change, as modified by Amendment No. 

4, is consistent with the Act. Comments 

may be submitted by any of the 

following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number SR–NASD–2003–140 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number SR–NASD–2003–140. This file 

number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for Web site viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street, NE., 

Washington, DC 20549, on official 

business days between the hours of 10 

a.m. and 3 p.m. Copies of such filing 

also will be available for inspection and 

copying at the principal office of 

FINRA. All comments received will be 

posted without change; the Commission 

does not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File 

Number SR–NASD–2003–140 and 

should be submitted on or before 

October 26, 2010. 

VII. Conclusion 

It is therefore ordered pursuant to 

Section 19(b)(2) of the Act, that the 

proposed rule change (SR–NASD–2003– 

140), as modified by Amendment Nos. 

1 through 4, be, and hereby is, approved 

on an accelerated basis. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.47

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. 2010–24899 Filed 10–4–10; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–63004; File No. SR–Phlx2010–126] 

Self-Regulatory Organizations; 

NASDAQ OMX PHLX LLC; Notice of 

Filing and Immediate Effectiveness of 

Proposed Rule Change Regarding 

Individual Stock Trading Pauses 

September 29, 2010. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on 

September 22, 2010, NASDAQ OMX 

PHLX LLC (‘‘PHLX’’ or the ‘‘Exchange’’) 

filed with the Securities and Exchange 

Commission (‘‘Commission’’) the 

proposed rule change as described in 

Items I and II below, which Items have 

been prepared by the Exchange. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange proposes to amend 

PHLX Rule 3100(a)(4) to add securities 

included in the Russell 1000 Index 

(‘‘Russell 1000’’) and specified Exchange 

Traded Products (‘‘ETP’’) to the 

definition of Circuit Breaker Securities. 

The text of the proposed rule change is 

available from the Exchange’s Web site 

at http:// 

nasdaqomxphlx.cchwallstreet.com, at 

the Exchange’s principal office, and at 

the Commission’s Public Reference 

Room. 

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