Securities Industry Association Suggests Revisions To NASD Initial Public Offering Proposals

The Securities Industry Association emphasized its continued support of the NASD's efforts to improve the initial public offering process, and specifically, the transparency of IPO pricing. While generally praising the goals of the price transparency proposals, which draw on the recommendations of the report of the NASD/NYSE IPO Advisory Committee, SIA suggested modifications to the proposed rules to better serve issuers and investors. SIA also raised substantive concerns in response to the "potential regulatory initiatives" for which the NASD seeks comment in the Notice.

SIA would make the proposed rules relating to price transparency direct requirements of the issuer or underwriter, rather than requiring these provisions to be included in underwriting agreements. SIA supports a requirement to report indications of interest of institutional investors in the institutional "pot," as well as rules intended to govern the disposition of shares returned to the underwriter. Finally, SIA would impose some limits on the scope of the proposed ban on market orders on the first day of trading, to ensure that there is sufficient liquidity in the market for a new issue.

SIA objects to the potential regulatory initiatives calling for independent pricing and use of auction models. An independent pricing opinion from a third-party broker-dealer would add considerable cost to the IPO process with little meaningful benefit to issuers or investors. Requiring the use of an auction system would clearly run counter to the recommendation of the IPO Advisory Committee Report which states that markets, and not regulators, should determine which capital raising model is appropriate for IPOs. SIA agreed that additional disclosure of company data, like financial projections, should be explored further, however, requiring a valuation disclosure section in the prospectus will only give investors a false or incomplete impression of how the offering price was derived.

The IPO Advisory Committee's recommendations were carefully targeted at improving disclosure and price transparency, and ending specific practices relating to the allocation of securities. SIA encourages efforts by regulators to develop carefully targeted means of implementing these recommendations. At the same time, the IPO Panel also recognized that the US system of capital raising system is the most successful in the world and is the engine for our country's economic growth, enabling companies to raise the capital they need to expand and hire employees. Strengthening this world-leading and time-tested system for the benefit of issuers and investors should always be the first order of duty for the industry and regulators.

The comment letter is available at http://www.sia.com/2004_comment_letters/pdf/NASD_IPO.pdf

SIA also has a primer explaining initial public offerings at http://www.sia.com/key_issues/pdf/IPO.pdf