NASD Rule 2790

NASD Rule 2790, now FINRA Rule 5130, was enacted in March 2004 to help make public offerings more equitable for dealers and investors. FINRA adopted the Rule as Rule 5130 in the Consolidated FINRA Rulebook with only minor changes. NASD Rule 2790 originally replaced the Free-Riding and Withholding Interpretation and was designed at the time “to protect the integrity of the public offering process.”

At the time Rule 2790 was enacted, the NASD, (now FINRA) stated that the rule was created to ensure that: “(1) NASD members make bona fide public offerings of securities at the offering price; (2) members do not withhold securities in a public offering for their own benefit or use such securities to reward persons who are in a position to direct future business to members; and (3) industry insiders, including NASD members and their associated persons, do not take advantage of their insider position to purchase new issues for their own benefit at the expense of public customers.” Public offerings of stock may be an initial public offering (IPO) or follow-on public offer (FPO).

FINRA Rule 5130 superseded NASD Rule 2790 with only minor changes. Originally, Rule 2790 eliminated the requirement that an offering must be a “hot issue” in order for certain parties to be restricted from purchasing and trading the offering. Generally, it wouldn’t become known until close to or just after issue whether an offering was hot, making the distinction problematic. Rule 2790 eliminated the category of “conditionally restricted” persons, and more narrowly defined the category of restricted persons, but did not provide exemptions based on a person’s individual circumstances. Rule 2790 also adopted a “de minimis” exemption, allowing an account that is beneficially owned in part by restricted persons to purchase new issues if the beneficial interests of such persons did not exceed 10 percent of the account. Rule 2790 also standardized the records firms must maintain evidencing that sales to accounts are in accordance with the Rule.