New Issue Allocation Restrictions

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.

Restricted Persons

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.

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. A broker-dealer employee's father-in-law cannot buy an IPO allocation through a personal account.

Annual Representation and De Minimis Exemption

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

• Annual representation: Account confirms 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

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.

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.
• De minimis cap is 10%. Restricted-person interests at or below 10% do not disqualify the account; above 10% disqualifies.

Spinning Prohibition

A separate rule prohibits spinning: a member firm may not allocate new-issue shares to an executive officer or director of a current, prospective, or recent investment-banking client in exchange for the firm winning investment-banking business.

• The prohibition catches the firm allocating IPO shares to a CEO of a company whose investment-banking mandate the firm is pursuing
• The conflict is allocating hot IPOs to executives in a position to direct underwriting work back to the firm
• The rule applies whether or not there is an explicit quid-pro-quo agreement; the appearance of conflict is enough

Exam Tip: Gotchas

• Spinning is allocating hot IPOs to executives who can direct underwriting business to the firm. No explicit agreement is required; the conflict alone violates the rule.
• Spinning sits inside the new-issue allocation regime. The executives at issue are not "restricted persons" under the standard categories, but the allocation is still prohibited because of the conflict.

Fixed-Price Offering Rule

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; lifts once the offering is complete

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 applies during the distribution. Once the distribution is complete and the offering is over, normal market trading and pricing apply.

Pre-Listing Transaction Rule

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.

Pricing Notification Requirements

Firms participating in offerings must give FINRA written notice of pricing, distribution start and completion, restricted-period start, penalty-bid imposition, and syndicate covering activity. 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
• 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.