Lawmaker seeks advice on IPOs after Facebook fiasco
WASHINGTON (Reuters) - A congressional committee is asking the Securities and Exchange Commission for advice about whether rules governing initial public offerings need to be changed in light of Facebook's debut last month.
Republican Representative Darrell Issa, who chairs the House Oversight Committee, called on regulators to examine the framework that governs how the prices for IPOs are set.
In a letter dated Tuesday but provided to Reuters on Thursday, Issa asked SEC Chairman Mary Schapiro to answer a series of questions about whether current regulations leave too much discretion in the hands of underwriters, and whether restrictions on communication give preferred clients an unfair advantage over ordinary investors.
"The Facebook IPO taught us that, at a minimum, the IPO process suffers substantial flaws," Issa said in the letter.
Analysts at several banks, including lead underwriters Morgan Stanley, cut revenue forecasts for Facebook in advance of the IPO and shared that information with select clients, a move that has raised concerns about potential disadvantages for ordinary investors.
It is unclear how big an appetite Congress has for pushing IPO reforms. A Senate Banking panel on Wednesday heard testimony about whether the IPO process works for ordinary investors and the chairman of that hearing, Jack Reed, expressed interest in examining the issue.
But lawmakers at a separate Wednesday hearing on market structure before a House Financial Services subcommittee did not press market players on Facebook-related issues, and witnesses only made brief references to them.
Facebook's May 18 market debut was delayed by half an hour due to a technical glitch, after which market makers did not receive confirmations of their opening orders for two hours, while some orders were lost entirely. Losses among market makers have been pegged as high as $450 million.
Facebook's shares have mostly traded well below their $38 IPO price after eking out a 23-cent gain by the end of its May 18 market debut. At Wednesday's $31.60 close they were down 17 percent from their IPO price.
Issa's main concern relates to how underwriters set the initial price of an IPO. The entire framework fails to provide a market-based mechanism to price IPOs, he said.
Investment banks that underwrite an offering usually set the price, often after surveying institutional clients.
Issa suggested an alternate method known as a "Dutch auction," which Google used during its IPO. In a Dutch auction, ordinary investors can also participate in setting the initial price.
Issa asked the SEC to provide the requested information by July 3.
The letter was first reported by the Wall Street Journal.
(Reporting By Aruna Viswanatha; Editing by Tim Dobbyn)
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