SEC Meeting: Regulation M

By: Cydney Posner

At an open meeting this morning, the SEC voted to propose amendments to Reg M that attempt to address abusive practices perceived to undermine the integrity and fairness of the offering process. Many of these practices came to light in the aftermath of The Bubble. The proposed amendments would prohibit the acceptance of additional consideration beyond that stated in the offering document in connection with a securities offering, extend the restricted period (the period when underwriters must refrain from stimulating market activity in a security), enhance the transparency of syndicate-covering activity (for example, by requiring identification of syndicate-covering bids), eliminate use of penalty bids (contractual terms which allow the managing underwriter to reclaim selling commissions when the brokers' customer resells immediately in the aftermarket), adjust certain dollar value thresholds for inflation and institute a recordkeeping requirement with respect to the de minimis exception. The proposal would extend the restricted period, which currently commences five days prior to pricing of the offering, to commence instead when the issuer reaches an understanding with the underwriter about conducting an offering. These changes are directed at practices such as kickbacks paid to underwriters for IPO allocations and conditioning the allocation of IPO shares on a customer's commitment to buy additional shares in the aftermarket, to buy shares in an unrelated offering at higher commissions or to buy shares in cold offerings. Other concerns addressed by the proposal are a lack of transparency, especially for retail customers, regarding conduct such as syndicate-covering activities and an understanding that penalty bids were applied discriminately in connection with purchases by retail customers. The staff indicated that they are not attempting to interfere with IPO allocations made to maintain legitimate customer relationships, i.e., those with high levels of order flow (although that may be a fine line to draw).

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