Spinning is the practice of allocating highly sought-after IPO shares, also known as hot stock, to individuals who are in a position to direct securities business to the firm. This is why portfolio managers are categorized as restricted persons. These individuals are in a position to direct business to a firm and may be willing to do so based on the size of their allocation.
Rule 5131 prohibits the allocation of new issue shares to any account in which an executive officer or director of a public company or covered non-public company, or a person materially supported by such executive officer or director, has a beneficial interest:
- 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
- If 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 three months
- 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.
This prohibition does not apply to allocations directed in writing by the issuer, its affiliates, or selling shareholders, provided that the member has no involvement or influence, directly or indirectly, in the allocation decisions of such persons. This exception protects directed share and similar programs.
Public and Covered Non-Public Company
A “public company” is any company that is registered under Section 12 of the Securities Exchange Act of 1934 or files periodic reports pursuant to Section 15(d) thereof. See FINRA Rule 5131(e)(1).
The term “covered non-public company” means 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 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. See FINRA Rule 5131(e)(3).
Policies and Procedures
Rule 5131(b)(1) requires that members establish 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 a member.
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