“The Securities and Exchange Commission proposed stricter rules aimed at preventing underwriters from artificially stimulating demand for new stock offerings,” writes Deborah Solomon in today’s Wall Street Journal.

“The proposals are an outgrowth of problems that surfaced during the recent stock-market bubble, when regulators say underwriters distorted the market by creating artificial demand for initial public offerings. SEC officials said the agency needs stricter rules so investors aren’t manipulated or misled when buying shares.”

“Separately, a federal judge in Manhattan granted class-action status to six cases that are expected to provide the basis for how more than 300 proposed IPO lawsuits will proceed. The cases stemmed from litigation over the allocation of IPOs during the stock-market boom of the late 1990s.”

“SEC Chairman William Donaldson said the stricter rules are needed for investors ‘to have confidence in the integrity and fairness of the IPO process.’ He said the SEC has uncovered instances of underwriters engaging in misconduct during the offering process and said the SEC needs to take steps to prevent manipulative practices.”

“The five-member commission voted unanimously to propose several changes, including a rule that would prohibit underwriters from demanding that investors who want shares of a hot IPO pay higher commissions or agree to buy another, less-desirable stock. The SEC already has sued several underwriters over the practice, which is known as ‘tying’, but commission officials said they want a rule that explicitly prohibits the practice.”

“The SEC also proposed lengthening the ‘restricted period’ during which time underwriters must refrain from selling or buying shares in the open market or inciting others to purchase shares. Currently, underwriters must wait five days before engaging in any activity that could ‘stimulate the market’. But SEC officials said they believe that period should extend until an IPO distribution is complete, a process than can take minutes or weeks.”

“Regulators also proposed prohibiting brokers from imposing a penalty on investors who try to sell IPO shares within a certain time period. But SEC staff said such penalties can function as ‘an undisclosed form of stabilization’ since they prevent investors from getting out of a stock quickly.”