NASD Adopts New IPO Rule Replacing Hot Issue Rule

On October 24, the SEC approved new NASD Rule 2790 (the “IPO Rule”), which restructures and replaces the NASD’s Free Riding and Withholding Interpretation, IM-2110-1 (the “Hot Issue Interpretation”). The IPO Rule, like the Hot Issue Interpretation it replaces, is intended to protect the integrity of the public offering process by ensuring that (1) NASD members make bona fide public offerings of securities at the public offering price, (2) NASD members do not withhold securities in a public offering for their own benefit or use such securities to reward persons who are in a position to direct future business to members and (3) industry insiders, including NASD members and their associated persons, do not take advantage of their “insider” positions to purchase new issues for their own benefit at the expense of public customers.

The IPO Rule generally prohibits an NASD member from selling a “new issue” to an account in which a “restricted person” has a beneficial interest (unless otherwise specifically permitted under the IPO Rule). Similarly, a member may not purchase a new issue for a restricted person’s account (unless otherwise permitted) or continue to hold ew issue securities that it is distributing. The IPO Rule also requires NASD members to meet certain preconditions, discussed below, prior to selling a new issue to an account.

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