Issuing Corporate Securities - Free Riding And Withholding / FINRA Rule 5130

A broker dealer underwriting a new issue must make a complete and bona fide offering of all securities being issued to the public and may not withhold any of the securities for:

  • The account of underwriters
  • The account of another broker dealer
  • The account of a firm employee or the account of those who are financially dependent on the employee
  • The account of employees of other National Association of Securities Dealers members


An exception to FINRA Rule 5130 applies to employees of limited broker dealers who engage solely in the purchase and sale of investment company products or DPPs. Employees of limited broker dealers may purchase new issues. This exemption applies only to the employees of the limited broker dealer, not to the firm itself.

These rules are in effect for all new issues, but are especially prevalent when dealing with a “hot issue.” A hot issue is one that trades at an immediate premium to its offering price in the secondary market. A broker dealer may not free ride by withholding securities for its own account or for the accounts of those listed above. FINRA Rule 5130 has replaced the freeriding and withholding rule. FINRA Rule 5130 requires that a broker dealer obtain an eligibility statement from all account owners who purchase a new issue of stock within 12 months prior to the purchase. There are some people who may purchase hot issues so long as the amount is not substantial and they have a history of purchasing new issues. These conditionally approved people are:

  • Officers and employees of financial institutions
  • Non supported family members
  • Accountants, attorneys, and finders associated with the underwriting
  • Accounts where restricted persons interest is limited to 10% or less
Underwriting Corporate Securities
Related Articles
  1. Professionals

    Series 99

    FINRA/NASAA Series 99 Exam Guide
  2. Professionals

    Series 24

    FINRA/NASAA Series 24 Exam Guide
  3. Professionals

    Breaking Down Financial Securities Licenses

    Find out which exam you need to begin your career as an investment professional.
  4. Professionals

    Sell-Side Analysts Need Series 86/87 Exams

    Though these tests are not particularly difficult or comprehensive, passing them is mandatory to work as a sell-side analyst.
  5. Professionals

    Succeeding At The Series 63 Exam

    Your career as a securities agent begins with this test. We'll show you how to score high.
  6. Professionals

    Becoming A Registered Investment Advisor

    To become a registered investment advisor requires specific licensing, qualifications and regulations, but the greater freedom may be worth it.
  7. Investing Basics

    How To Handle A Serious Dispute With Your Broker

    Find out what to do if you have a dispute with your broker.
  8. Professionals

    Hedge Funds and the Law

    Learn how hedge funds have gotten in trouble for illegal insider trading. Read about questionable high-frequency trading (HFT) strategies.
  9. Professionals

    Career Advice: Financial Analyst Vs. Investment Banker

    Read an in-depth comparison about working as a Financial Analyst vs. working as an Investment Banker, two highly prestigious business careers.
  10. Professionals

    Who Needs to Take the Series 65?

    Most states require individuals to pass the Series 65 exam in order to act as investment advisors.
  1. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin ...
  2. Series 6

    A securities license entitling the holder to register as a limited ...
  3. Comprehensive Automated Risk Data ...

    The Comprehensive Automated Risk Data System (CARDS) is an initiative ...
  4. Corporate Financing Committee

    A regulatory group that reviews documentation that is submitted ...
  5. Series 79

    A examination to ensure a candidate is qualified to become a ...
  6. Research Analyst

    A person who prepares investigative reports on equity securities. ...
  1. Are hedge funds regulated by FINRA?

    Alternative investment vehicles such as hedge funds offer investors a wider range of possibilities due to certain exceptions ... Read Full Answer >>
  2. How are variable annuities regulated?

    The sale of a variable annuity is regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory ... Read Full Answer >>
  3. Do financial advisors need to pass the Series 7 exam?

    The exact nature of a financial advisor's job responsibilities determines whether he must have a Series 7 license. If a financial ... Read Full Answer >>
  4. Is a financial advisor required to have a degree?

    Financial advisors are not required to have university degrees. However, they are required to pass certain exams administered ... Read Full Answer >>
  5. Do financial advisors need to be approved by FINRA?

    The term "financial advisor" can refer to a couple of different roles. It most often refers to a broker-dealer or an investment ... Read Full Answer >>
  6. How does a broker decide which customers are eligible to open a margin account?

    Brokers have the sole discretion to determine which customers may open margin accounts with them, although there are regulations ... Read Full Answer >>
Hot Definitions
  1. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  2. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  3. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  4. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  5. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  6. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
Trading Center