IPO Reform Plan May Not Address All Issues
A special committee studying reforms of the initial public stock offering market will propose barring newly public firms from giving out their shares to win business, according to committee members.
However, the panel isn’t expected to address what some experts say are the factors behind IPO-related abuses in the late 1990s, such as the rampant underpricing of the stocks, said one committee member who asked not to be named.
Though the transgressions of stock analysts have drawn more public attention, misconduct in the IPO market is considered to have been equally harmful to small investors in the late 1990s. Investors have launched dozens of lawsuits alleging IPO wrongdoing by brokerages, and regulators are considering reforms to stamp out abusive practices.
IPO reform is shaping up as a key test of whether efforts to reform Wall Street result in changes that actually make it a fairer place for investors.
The NASD, the regulatory group formerly known as the National Assn. of Securities Dealers, proposed various reforms in July, including banning investment banks from handing out coveted IPO shares to institutional investors that agree to pay excessive commissions or buy more shares later.
The IPO reform committee was appointed in October by the NASD and the New York Stock Exchange at the request of then-Securities and Exchange Commission Chairman Harvey L. Pitt. The suggestions in the report, which is expected to be released soon, would have to be approved by the SEC.
The $1.4-billion settlement announced late last month between regulators and 10 major brokerages contained limited IPO reform. Specifically, it banned the practice of “spinning,” in which Wall Street firms allocated hot IPO shares to corporate executives to coax them to hire the brokerages for investment banking work.
The committee is studying broader issues. One key proposal, sources said, will involve so-called friends and family shares. As the name implies, these are shares that are sold at bargain IPO prices to various individuals at the direction of the company going public.
Regulators are concerned that some companies have used these shares as bribes. For example, a company might order that shares be directed to customers as a way to curry favor and win business.
Another proposal would require limited disclosure of who is getting IPO shares.
The committee is not expected to suggest reforms addressing underpricing -- the practice in which investment banks sell IPO shares to investors for less than the banks know the stock could fetch in the open market. For example, a stock expected to trade at $25 might be priced at $20. Such pricing yielded almost certain profits for IPO buyers during the bull run.
Yet some experts say it is impossible to reform the IPO market without tackling underpricing. “The report will definitely address some of the abuses but in my mind doesn’t get at some of the fundamental underlying causes,” one member of the committee said.