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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

NASD Rule 2790

What it is:

NASD Rule 2790 is a rule prohibiting FINRA members from buying IPO shares for personal gain. The rule is now just called Rule 2790, because NASD became FINRA in 2007.

How it works (Example):

For example, let's say John Doe is a financial advisor. Company XYZ is about to go public, and everybody wants the shares.

John has a client, Jane Smith, who is dying to get her hands on some Company XYZ shares. She calls John and asks if he can do anything to get some shares for her. John happens to be the old college roommate of the investment banker in charge of the IPO, and the old roommate offers to let John buy 5,000 shares of the IPO, which is likely to double on the first day of trading.

Under Rule 2790, John cannot buy the shares for himself if doing so would be at the expense of his client, Jane Smith. Instead, John must attempt to get the 5,000 for Jane.

Why it Matters:

The idea behind Rule 2790 is to prevent industry insiders, including FINRA members and their associated persons, from taking advantage of their "insider" positions in the industry to purchase new issues for their own benefit at the expense of customers. Enacted in March 2004, Rule 2790 generally prohibits a FINRA member from selling a new issue to a "restricted person:" anybody who works for, owns or is affiliated with a broker/dealer. Before selling any new issue to any account, FINRA members must get a representation from the owner of the account that the owner is eligible to buy the shares in accordance with the rule.

It is important to note that Rule 2790 does not apply to asset-backed securities, ADRs and certain other securities.

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