New-Issue Allocation and Distribution Controls

The new-issue rule is the single most testable distribution-side compliance rule on the exam. The mechanics are about who can buy what, in what kind of offering, and how the broker-dealer documents eligibility.

What Counts as a "New Issue"?

The new-issue rule applies only to initial public offerings (IPOs) of common equity. The definition is narrow on purpose.

The exam frequently tests whether a fact pattern is or is not a "new issue." A SPAC IPO is not a new issue; a regular operating-company IPO is.

Exam Tip: Gotchas

• The new-issue rule covers IPOs of common equity only. A restricted person CAN buy a preferred-stock IPO, a convertible IPO, a regulation D placement, or a follow-on offering; those are all outside the rule.
• Secondary offerings are not new issues. Only the first public sale of common equity counts.

Who Counts as a Restricted Person?

The category of restricted persons is broader than just broker-dealer personnel.

The portfolio-manager category is intentionally broad. It captures hedge fund managers, mutual fund managers, registered investment adviser portfolio managers, insurance-company portfolio managers, and bank trust officers. The family-member sweep further extends coverage to spouses, parents-in-law, and dependents.

Think of it this way: the new-issue rule exists to prevent industry insiders from front-running retail investors on hot IPO allocations. Anyone with influence over allocation decisions (broker-dealer employees), anyone whose firm depends on underwriting business (finders and fiduciaries), and anyone managing institutional capital (portfolio managers) is barred. The family-member sweep prevents end-runs through household accounts.

For a broker-dealer employee's family member specifically, family relationship alone is not enough to make that person restricted. The family member is restricted only when the covered employee materially supports (or receives support from) that person, works for the member or an affiliate selling the new issue to that person, or can control the allocation.

Exam Tip: Gotchas

• "Restricted person" is broader than "broker-dealer." Anyone with portfolio-management authority over an institutional account is restricted; that captures hedge-fund managers, mutual-fund managers, RIA portfolio managers, insurance-company portfolio managers, and bank trust officers.
• The family-member sweep extends to in-laws, siblings, children, and dependents, but family relationship ALONE is not enough for a broker-dealer employee's relative. Material support, working for the selling member/affiliate, or control over the allocation is what makes the relative restricted.

What Do the Annual Representation and De Minimis Exemption Require?

Before allocating any new-issue shares, the broker-dealer must obtain a written representation within the past 12 months confirming the account is eligible.

• Good-faith representation: A written, good-faith representation from the account confirming it is not a restricted person (or qualifies under the de minimis exemption)
• De minimis exemption: An account may hold restricted-person interests up to 10% without losing new-issue eligibility
• Refresh cycle: The representation must be current within 12 months; expired representations require a refresh before any new allocation
• Eligibility record retention: The member keeps the eligibility records for at least 3 years after the account's last new-issue sale

The de minimis exemption is designed for institutional accounts (mutual funds, pensions) that have small restricted-person investors (e.g., a broker-dealer subsidiary holding a 5% stake in a hedge fund's master fund). Below 10%, the account remains eligible; above 10%, the account is restricted. Other new-issue exemptions include specified investment funds and retirement plans, charitable organizations, issuer-directed securities, antidilution purchases, and standby underwriting arrangements.

Exam Tip: Gotchas

• The annual representation must be obtained within the past 12 months. A 14-month-old representation is stale and must be refreshed before any new IPO allocation. The eligibility records themselves are kept longer: at least 3 years after the last sale.
• De minimis cap is 10%. Restricted-person interests at or below 10% do not disqualify the account; above 10% disqualifies.

What Does the Fixed-Price Offering Rule Require?

During a fixed-price offering, syndicate members must sell at the stated public offering price (POP). The fixed-price rule blocks any reduced-price sales (direct or indirect) to anyone outside the syndicate or selling group.

• Reduced price: Captures direct AND indirect economic equivalents:
  • Selling concessions to non-syndicate buyers
  • Discounts, allowances, credits, rebates
  • Fee reductions, below-market services, above-market securities purchases
• Purpose: Defeat "recapture" devices that historically let favored buyers split the concession back to themselves
• Coverage: Applies during the distribution period, and lasts until the offering terminates or until a bona fide public offering has occurred and the member can no longer continue selling at the stated price
• Presumption: Securities trading above the offering price are presumed salable at market, which is a signal the fixed-price restriction has run its course for that security

A syndicate member that gave a buyer free research or below-market brokerage services as a sweetener would violate the rule even if the share price was nominally POP.

Exam Tip: Gotchas

• The fixed-price rule captures economic equivalents of a price below POP, not just literal price discounts. Free research, below-market brokerage, or above-market securities purchases all count.
• The rule ends at termination, or once a bona fide public offering has occurred and the member can no longer sell at the stated price. Trading above the offering price is presumed salable, which is not the same as an automatic, date-certain expiration.

What Does the Pre-Listing Transaction Rule Require?

No member may execute an off-exchange transaction in an IPO security until the security has first opened for trading on its listing exchange.

• When the rule lifts: The listing exchange disseminates the opening transaction
• Purpose: Prevent pre-open over-the-counter (OTC) trading from front-running exchange price discovery
• Effect: Forces all early IPO trading through the listing exchange's opening auction, which is where institutional buyers and sellers meet

Exam Tip: Gotchas

• Off-exchange IPO transactions are blocked until the listing exchange opens. The opening transaction on the listing exchange is the green light.
• The rule prevents OTC front-running of the listing exchange's price discovery. Liquidity and price information are concentrated at the exchange open.

What Pricing Notification Requirements Apply?

Firms participating in offerings must give FINRA written notice of the restricted-period start, the pricing, any cancellation or postponement, and any penalty bid or syndicate covering transaction. The notice timing and content matter for the exam.

• Pricing notice timing: No later than the close of business on the next business day following pricing
• Notice content: Name and symbol of security, type, shares offered, offering price, last sale before distribution, pricing basis, SEC effective date and time, trade date, distribution participants, affiliated purchasers
• Restricted-period notice: Identifies the applicable restricted period and the basis for it (which Regulation M liquidity tier applies), plus any cancellation or postponement of the offering
• Penalty-bid and syndicate-covering notices: Required specifically for penalty bids and syndicate covering transactions in over-the-counter equity securities
• Purpose: Support FINRA's monitoring of trading-restriction compliance during the offering

Exam Tip: Gotchas

• Pricing notice is due the next business day after pricing. Not the same day; not the trade date. Next business day at close.
• Notice content includes the offering participants and affiliated purchasers. Both lists are required so the regulator can track who is subject to the trading restrictions during the distribution.

Who Files New-Issue Distribution Information?

Separately, the book-running manager files new-issue distribution information with FINRA.

• Filer: The book-running manager, not every syndicate member individually
• Content: Each participant's underwriting commitment and retention amounts
• Purpose: Lets FINRA reconcile syndicate economics against the pricing and eligibility notices already on file

Exam Tip: Gotchas

• The book-running manager, not the full syndicate, files the distribution-information report. The report captures each participant's commitment and retention, not just the manager's own numbers.

What Should You Check on Exam Day?

• Can you identify what qualifies as a "new issue" (IPO of common equity only) and list at least three offering types that do NOT qualify (follow-ons, secondaries, debt, preferred/convertible IPOs, private placements, SPACs, BDCs, REITs, DPPs)?
• Do you know the five restricted-person categories, including that portfolio managers over institutional accounts and family members meeting the material-support or control test are restricted?
• Can you state the de minimis exemption threshold (10% restricted-person interest) and the annual representation and eligibility-record retention periods (12 months to refresh; 3 years to retain)?
• Can you explain what the fixed-price offering rule blocks, including that non-cash sweeteners like free research count as indirect price reductions?
• Do you know the pricing-notice deadline (close of business the next business day after pricing) and who files the new-issue distribution information (the book-running manager)?