OT flipping ipo's
June 16, 1999
E*Trade Tweaks Its Policy
For Reining In IPO 'Flipping'
By ANDREW FRASER
THE WALL STREET JOURNAL INTERACTIVE EDITION
E*Trade Group Inc. has made a subtle but noticeable change to its policy
regarding how it will punish customers who cash out shares of initial public
offerings less than 30 days after receiving them -- using language that
suggests a tougher stand against IPO flipping.
The shift comes as federal and state
regulators continue probes into ways in
which brokerage firms seek to prevent
individuals from flipping IPOs, although the
investigations aren't focusing specifically on online brokers. Regulators,
meanwhile, are concerned that antiflipping policies are unfair to individual
investors.
An E*Trade official played down the change -- casting it as a meaningless
adjustment in wording. Flipping refers to selling shares of IPOs shortly
after they begin trading in the market. IPOs that are in strong demand often
race higher when they begin trading, and a quick sale can generate a big
profit. But brokerages often try to rein in these rapid sales.
E*Trade, Palo Alto, Calif., posted a new antiflipping notice on its Web site
(www.etrade.com) last week. It announced that before awarding IPO
shares, it will review customers' accounts to gauge their compliance with
the firm's antiflipping policy. The firm says customers "with a history of
short holding periods will receive lesser allocation priority" for future deals
-- or essentially be sent to the back of the line. That's important because
hot deals go fast.
In the past, E*Trade's policy had said simply
that the firm "would prefer that customers hold
their allocated shares for at least 30 days,"
adding that customers "with a record of short
holding periods may be excluded from future
offerings."
E*Trade, the No. 2 online broker in the U.S. behind Charles Schwab
Corp., has never threatened to prevent customers from selling IPO shares
whenever they want, and that hasn't changed.
But being placed at the back of the line, especially for a hot IPO, almost
guarantees that a customer won't get any shares because the demand by
online investors at E*Trade and other Web brokers far exceeds supply.
The coveted investments generally have been reserved for professional
money managers and brokers' very wealthy clients, who still get most of
the shares available.
Online investors have long speculated that E*Trade is lax in enforcing its
policy against customers who flip IPOs. Many posted messages on the
Internet that they were able to get new allocations even though they had a
history of flipping. But now there is concern among investors that E*Trade
may be tightening up.
Underwriters abhor flipping, because it tends to make a stock more
volatile and depresses its price after an initial run-up, angering issuers. For
online brokerages, the pressure to curb flipping is particularly great
because if too many customers flip, the firms run the risk of being shut out
of the "syndicate" selected to distribute IPO shares.
Indeed, E*Trade explained in the notice on its Web site that its ability to
obtain IPO shares could be affected by flipping.
"The rationale for allocating shares to customers who tend to hold for
longer periods is that it helps E*Trade get access to more offerings and
more shares as issuers of new stock seek to build stability in the
aftermarket," E*Trade said in the notice.
But an E*Trade spokesman, who declined to be identified, said that
flipping by customers so far hasn't caused E*Trade any problems with
underwriters. He maintained E*Trade just wanted to explain the reason for
its antiflipping policy, adding that most of the firm's clients hold their shares
for an extended period.
Nevertheless, discouraging flipping is "important because underwriters and
an issuing company will bring up that subject every time," the spokesman
said.
An executive of another online brokerage firm,
who also declined to be quoted by name, said
investment banks that underwrite new stocks
would withhold shares from a firm "if it didn't
represent high quality distribution as
represented by the behavior of its customer
base."
E*Trade isn't the only brokerage that tries to
prevent its clients from flipping an IPO. At
Schwab, for example, flipping an IPO within
30 days will get you barred from future deals
for six months. At Fidelity Investments and
Wit Capital, investors also risk being barred
from future deals if they sell their IPO
allocations too quickly. Big full-service
brokerages often penalize brokers whose
clients flip an IPO.
Regulators are looking at the disparity
between the way institutional investors and
individuals are treated regarding flipping. Big full-service brokerage firms
routinely allow institutional clients to quickly flip IPOs at will, while trying
to persuade individual customers to hold on to IPOs. The antiflipping
dictum often conflicts with the interests of investors, many of whom are
drawn to IPOs because of the potential for big, fast profits. If profits aren't
grabbed quickly, they may evaporate.
One of the major concerns of regulators is the penalty brokers face if their
clients flip. Regulators want to know if firms have fully disclosed their
policies to investors. They want to ensure that investors are aware of
brokers' self-interest when they advise against flipping IPO shares.
The North American Securities Administrators Association, an umbrella
group of state securities regulators, and the U.S. Securities and Exchange
Commission launched probes into securities firms' antiflipping policies after
The Wall Street Journal highlighted the issue last summer. The SEC didn't
immediately respond to calls about the status of its probe. NASAA
officials said they expect to issue a report on their inquiry within the next
month.
Deborah Bortner, director of securities for Washington state and
chairwoman of the NASAA committee looking at the issue, says there is
evidence of a disparity in the way securities firms handle flipping by
institutions and individuals. But she added this was her personal opinion
and that she didn't "think the flipping policy rises to the level of an unfair
and dishonest and unethical practice."
Robert D. Terry, assistant commissioner of securities in Georgia and
author of the coming NASAA report, says "There is certainly the potential
for unfairness in the system."
"Whether it is unfair and whether that rises to the level of a problem that
regulators can and should be able to intervene in -- that's something we
would just have to take a look at more closely," he says.
E*Trade toughened the language of its antiflipping policy as it joined other
Web brokers in shifting from a first-come, first-serve process for awarding
IPO shares to a lottery system many believe is fairer. Many investors have
complained on the Internet and to regulators that under the first-come,
first-serve method, they are shut out of the IPO party minutes after the
door opens.
Under the new system, E*Trade will allow investors a window of at least
two hours to submit orders for allocations in a given IPO. Those shares
will then be allocated randomly to investors after a review of their accounts
for compliance with the antiflipping policy. The new policy went into effect
June 8. E*Trade said it had received numerous complaints from investors
who said they could never get shares under the old procedure. The firm
said it hopes "the new procedure will result in an even broader spread of
public offering shares" among its clients.
|
