Spinning: FINRA Rule 5131


On September 29, 2010, the Securities and Exchange Commission (“SEC”) approved FINRA Rule 5131, on an accelerated basis, and solicited comments on the proposed final rule....


In 2002, the National Association of Securities Dealers, Inc. (the “NASD”) proposed Rule 2712 to address alleged abuses in the allocation and distribution of securities in initial public offerings (“IPOs”).1 In the late 1990s and 2000, an unusually large number of IPOs experienced substantial, immediate price increases upon the initiation of trading.2 The ability of investors to realize immediate profits on the first day of trading of a newly public security biased the allocation process as underwriters could essentially distribute profitable trades. Some underwriters allocated IPO shares to investors that could either share the profits or promise future business to the institution. Some institutional investors entered into improper arrangements in order to participate in IPOs due to the high likelihood of profitability.3

The rule proposal was amended four times since it was first proposed. The fourth amendment (“Amendment No. 4”) was published by FINRA, the successor to the NASD, on July 30, 2010. The proposed final rule approved by the SEC incorporates the changes included in Amendment No. 4. Under FINRA’s current regulatory structure, the proposed rule is Rule 5131 (“Rule 5131”). Rule 5131 addresses potential abuses in the allocation and distribution of securities in IPOs by regulating the following activities...

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