Freeriding and Withholding / FINRA Rule  5130

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. 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 upon the employee
  • The account of employees of other FINRA members
  • Any account that a restricted person has an interest in

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. 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

This rule does not apply to the following offerings or individuals:

  • Debt offerings
  • Preferred stock offerings
  • Rights offerings
  • Investment company offerings
  • Private offerings
  • Offerings exempt from The Securities Act of 1933
  • Representatives of limited broker dealers engaging in DPP or investment company offerings only

Broker dealers participating in the offering of equity securities must ensure that the purchase of the securities complies with FINRA rule 5130 by obtaining an affirmation from the account holder or from the agent or firm introducing the account to the underwriter. The affirmation may be submitted electronically. However oral assurances are not acceptable to demonstrate compliance with the rule. 

 

UNDERWRITING CORPORATE SECURITIES

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