Regulators Look at IP0 Penalty Bids

As the SEC and state regulators begin to investigate brokerage policies on penalty bids for brokers who flip IPOs, retail brokers say the issue doesnt affect them since most of their clients are long-term holders. And reps dont appear to have thought much about the disclosure issue--that is, should their clients know about a penalty bid and any incentive a rep has to keep them in an IPO?We dont have

As the SEC and state regulators begin to investigate brokerage policies on penalty bids for brokers who flip IPOs, retail brokers say the issue doesnt affect them since most of their clients are long-term holders. And reps dont appear to have thought much about the disclosure issue--that is, should their clients know about a penalty bid and any incentive a rep has to keep them in an IPO?

We dont have much say, says one broker with Morgan Stanley Dean Witter. Generally, I am looking for long-term investments for my clients. So something like the penalty bid doesnt affect me.

Adds a Salomon Smith Barney rep, Of course [bids are] not fair, but I view [IPOs] as a perk for my clients anyway.

While reps dont seem too concerned about the issue, regulators are. State regulators are examining brokerages disclosures to investors and whether they have been informed that their brokers could be penalized for quickly reselling IPOs. Several brokers tell RR they think penalty bids should be disclosed to clients. One PaineWebber rep says he does just that.

In August, regulators in Massachusetts filed a complaint against Joseph Charles & Associates, seeking to revoke the Boca Raton, Fla., firms license for its flipping policies and lack of disclosure. What regulators are focusing on are different policies for individual and institutional investors.

Well, certainly I do make a distinction among my clients, but I dont know whether that is considered policy or business, says one veteran Merrill Lynch broker. I do give preference, whether its a discounted commission or the ability to get in on an IPO, to my best clients--thats just good business. He says, like most other reps, that flipping isnt an issue since he looks for long-term investments for clients.

Fred Roberts, principal of F.M. Roberts, an investment banking firm in Los Angeles, says penalty bids are in place to ensure that investors are not encouraged to flip in and out of IPO positions, but often those policies are ignored by some brokerages. Look, there should be one policy for both institutions and individuals, period. Flipping is not good for anybody, says Roberts. He says that over time flipping costs everybody--the issuer, investors and the underwriter.

Investment bankers use the bids to minimize selling in the aftermarket, and therefore their expense in maintaining a new issues price for a period of time.

Penalty bids put brokers in a difficult position, says Tom Taulli, a Newport Beach, Calif.-based author who follows the IPO market. If an issue is up 120% in a few days, a broker almost has to recommend a sale, Taulli says. One solution is to have clients pay the penalty if they flip. Another solution might be to phase out the penalty when an issue rises in price, he says.

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