WASHINGTON: Artificially boosting demand for initial public offerings and ramping up related commissions would be restricted under rules proposed on Wednesday by the US Securities and Exchange Commission.
The five SEC commissioners voted unanimously to seek public comment on whether to ban questionable underwriting practices.
One is known as “laddering”. It involves recipients of IPO shares agreeing to buy more shares on the open market later, ensuring that the price of a hot stock offering continues to rise after the market debut.
The SEC proposal stems from enforcement cases it brought against top Wall Street companies for practices used during the late 1990s telecommunications and technology stock bubble.
“The price of an offering and the aftermarket trading price should be determined by investor demand,” SEC chairman William Donaldson told an open meeting of the commission, adding: “And should be free from manipulative influence or misconduct on the part of those who brought the offering to market and stand to profit the most from the transaction.”
Under its proposal, the SEC also seeks to restrict underwriters from demanding higher commissions from investors wanting to get in on a “hot” IPO – when a new stock quickly trades at a premium after hitting the open market.
Regulators also seek to prohibit underwriters and customers from “tying” an allocation of hot IPO shares to buying shares in less desirable “cold” offerings.
Additionally, the proposal would force underwriters to publicly disclose when they bid on shares to cover short positions, as a means to help prop up the share price. – Reuters