Trust and transparency are the cornerstones of the financial industry. This includes broker dealers. As part of this framework, the Financial Industry Regulatory Authority (“FINRA”) created Rules 5130 and 5131 to govern broker dealers regarding the issuance of new securities.
FINRA Rule 5130 places restrictions on the purchase and sale of initial public offerings (“IPOs”). The primary goal of this rule is to prevent unfair allocation of new issues to industry insiders. Industry insiders include broker dealers, their associated persons, and immediate family members. If this restriction was not in place, the investing public may not have the opportunities that should be offered to them. It is imperative that broker dealers conduct thorough due diligence to determine whether a potential investor qualifies as a restricted person under FINRA Rule 5130. Additionally, broker dealers must maintain accurate and detailed records of all new issue allocation and ensure that they are compliant with the rule’s requirements.
FINRA Rule 5131 focuses on conflicts of interest and preventing abusive practices with regards to the allocation and distribution of new issues. This rule prohibits practices such as spinning. Spinning is when new issues are allocated to executives of covered public or covered non-public companies. This rule also prohibits the improper use of client information in connection with new issue allocations. Maintaining records of new issue allocations and the associated disclosures is a requirement of FINRA. Your broker dealer should develop clear and transparent allocation policies that are consistent with the rules’ requirements and designed to prevent conflicts of interest.
By adhering to the guidelines set forth above, your broker dealer can not only meet the Financial Industry Regulatory Authority’s rules but also show your firm’s commitment to fairness and integrity in the allocation and distribution of new securities coming to the marketplace. If your broker dealer would like assistance regarding FINRA Rules 5130 and 5131, please contact Master Compliance here. Our team of compliance professionals can help your broker dealer navigate the nuances of these regulations. Compliance in this area not only benefits the investing public, but it also strengthens the reputation and credibility of the broker dealer industry.