Technology and Market Developments Warrant Review of IPO Quiet Period, Says SEC Chairman Schapiro

Replying to House Oversight Committee Chairman Darrell Issa’s (R-Calif.)’s worries about the IPO process, Securities and Exchange Commission Chairman Mary Schapiro wrote him a letter that, while standing by the existing structure, acknowledged that the Commission does need to take a look at the rules involving the “quiet period.” Per the rules, companies are not allowed to talk about their stock price to an offering during this time. Issa had recently told her that the SEC and Congress needed to take a more in-depth examination of both the way IPO’s are being priced and current communication restrictions.

Citing Facebook’s (PB) recent IPO in May, Issa pointed out that its underwriters gave negative forecasts about the company to certain institutional investors, which was a communication that current IPO rules allow. Retail investors, however, were not privy to this same information, so that when FB’s share price dropped significantly soon after trading started, it was the retail investors who were the ones that sustained most of the losses. Issa believes that quiet period rules discourage effective price discovery, which gives underwriters too much discretion in being able to establish IPO prices.

Although Schapiro did not talk about the Facebook IPO in her 32-page response, she argued that communication rules let the underwriter and company employ different means of figuring out the right securities price while simultaneously making sure that all prospective investors are given access to information that is consistent. She also spoke about how the quiet period is for making sure that all investors look at the offering documents of an issuer to get information about the IPO. Shapiro acknowledged that the SEC should look at current restrictions and she was adamant that making sure there is a proper regulatory structure for IPOs is integral to the “Commission’s mission to protect investors, facilitate capital formation, and maintain fair and orderly markets.”

Commenting on the exchange between Issa and Schapiro, Securities Lawyer William Shepherd had this to say: “The securities markets now operate at warp speed, but technological advances can work in two directions. Better technology can benefit all participants. Yet, better technology can also disadvantage all but the highest tech financial firms. The SEC should remember its role to protect investors from such disparities. If greater information is available to any investor, it should be easily available to all.”

Specifically addressing the “quiet period”, Shepherd, who is the founder of a stockbroker fraud law firm that represents clients throughout the US, said, “The required ‘quiet period,’ when a new issue is eminent, should not be violated to benefit a few, as was the situation during the Facebook initial public offering. Rather than working on plans to change the ‘quite period’ rules for the future, the SEC should first file charges against those who broke the current rule.”

Read Schapiro’s Letter to Issa (PDF)

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Should Retail Investors Be Given Greater Access to IPO Information?, Stockbroker Fraud Blog, June 29, 2012

Will the JOBS ACT Will Expand Private Offerings But Hurt Public Markets?, Institutional Investor Securities Blog, July 6, 2012
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