Delays in Implementation of Portions of FINRA Rule 5131

News Brief

By Cydney Posner

FINRA Rule 5131, discussed in the email below, was slated to become effective in its entirety on May 27, 2011. However, in a recent release, the SEC has delayed effectiveness of the portions of the rule related to "spinning" (an underwriter's allocation of IPO shares to directors or executives of investment banking clients in exchange for receipt of investment banking business) and "market orders." http://www.sec.gov/rules/sro/finra/2011/34-64341.pdf

The prohibition on spinning was implemented primarily through a series of prophylactic prohibitions on the allocation of new issues. Under paragraph (b)(1) of Rule 5131, FINRA members were required to establish policies and procedures to ensure that "investment banking personnel" had no involvement or influence in the new issue allocation decisions of the member. However, because the term "investment banking personnel" was not defined in the Rule, members raised concerns that certain necessary functions traditionally performed by syndicate personnel would be prohibited. As a result and given that the requirement appeared to be redundant of paragraph (b)(2) of NASD Rule 3010, FINRA proposed to delete paragraph (b)(1). Members also requested a delay to implement the steps necessary for compliance with the spinning provisions, and FINRA and the SEC agreed to delay implementation of paragraph (b), as amended, until September 26, 2011.

Members apparently also needed more time to implement the "market orders" provision in paragraph (d)(4) of the Rule, which prohibits members from accepting any market order for the purchase of shares of a new issue in the secondary market prior to the commencement of trading of those shares in the secondary market. Members indicated that they needed additional time to develop a process for reliably identifying new issues and to modify their order handling systems. Accordingly, FINRA and the SEC are also delaying the implementation date of paragraph (d)(4) until September 26, 2011.

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