Proposed Amendment to FINRA Rule 5131


On April 18, 2011, the Financial Industry Regulatory Authority, Inc. (“FINRA”) filed a proposed rule change with the Securities and Exchange Commission (“SEC”) which proposes to amend paragraphs (b) and (d)(4) of FINRA Rule 5131 (the “Amendment”). The proposed changes amend the spinning provisions (Rule 5131(b)) and the market order provisions (Rule 5131(d)(4)). In addition, the Amendment proposes delaying the effective date for the spinning provisions and the market order provisions to September 26, 2011, an additional four months. On April 26, 2011, the SEC released a notice regarding the rule change and solicited comments from the public. Comments are due on or prior to the date that is 15 days from the publication of the notice in the Federal Register. The SEC declared that, within 45 days of the date of publication of the notice in the Federal Register or within such longer period (i) as the SEC may designate (up to 90 days of such date if the SEC finds such longer period to be appropriate and publishes its reasons for so finding) or (ii) as to which FINRA consents, the SEC will either approve or disapprove the proposed rule change or institute proceedings to determine whether the proposed rule change should be disapproved. The SEC also noted that it is considering granting accelerated approval of the proposed rule change at the end of a 15-day comment period.

Adopting Rule 5131 has been on the agenda for some time. In 2002, the National Association of Securities Dealers, Inc., the predecessor to FINRA, proposed Rule 2712 to address alleged abuses in the allocation and distribution of securities in initial public offerings (“IPOs”). On September 29, 2010, the SEC approved FINRA Rule 5131, on an accelerated basis, and solicited comments on the proposed final rule. The approved version of Rule 5131 represented the fourth amendment of the original rule proposal. For a detailed discussion of Rule 5131 and its regulatory history, consult our recent Client Alert “Spinning: FINRA Rule 5131.” In November 2010, FINRA issued Regulatory Notice 10-60 announcing that the SEC had approved Rule 5131 and that it would go into effect on May 27, 2011.

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