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

TAKE NOTE!

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

Need Help Passing The Series 57 Exam?

Underwriting Corporate Securities

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