NASD Targets Conflict of Interest in IPOs

Regulators are taking aim at potential conflicts of interest in the highflying market for new stock issues with a rule proposed Thursday by the National Assn. of Securities Dealers.

The NASD, the chief self-regulatory group for the securities industry, said its board approved new rules aimed at ensuring that brokerages don’t distribute shares of newly public companies to individuals who are in a position to give the firms future business.

The rules, which will go to the Securities and Exchange Commission for final approval, would place more restrictions on how Wall Street brokerages allocate initial public offerings.

At the same time, the proposal would cut back the number of issues potentially subject to the restrictions.

The NASD is seeking to prohibit brokerages from holding back shares of hot offerings for investors who can direct business to the companies. Hedge fund managers, investment advisors and certain other investors specifically would be unable to personally buy into held-back shares of stocks that wind up performing well immediately after their launch.

But the definition of a “hot” new issue, for the purposes of the new restrictions, would be changed. The NASD currently defines a hot stock as any issue that rises above its IPO price when trading begins.

Under the proposed terms, a hot (and therefore restricted) IPO would be one that rises at least 5% in its first five minutes of trading.

That would, of course, still include most hot new Internet IPOs, which often double or rise even higher when they begin trading.

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Fund IPOs: Burnt Offerings

The harsh reception for Neuberger Berman Inc.’s initial public offering Thursday was similar to the treatment other mutual fund companies have gotten after going public. Combined, shares of five prominent money managers that have gone public in the last 18 months are down an average of 5% from their IPO prices.

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Ticker IPO IPO Thursday % Fund Company symbol date price close Change BlackRock BLK 10/1/99 $14.00 $14.13 +0.9% Neuberger Berman NEU 10/7/99 32.00 31.50 -1.6 Waddell & Reed WDR 3/5/98 23.00 22.44 -2.4 Federated Investors FII 5/14/98 19.00 17.00 -11.0 Gabelli Asset Mgt. GBL 2/11/99 17.50 15.56 -11.1 Average -5.0

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Sources: Times research, Bloomberg News