Capital Markets

New Rules for IPO Deal-makers

NYSE, Nasdaq recently announced tougher listing requirements for initial public offerings. But do the new rules go far enough?
Lori Calabro and Tim ReasonJuly 1, 2003

Can public confidence in the process of taking a company public be restored?

That is the hope of the IPO Advisory Committee, a group formed last October by the New York Stock Exchange and the National Association of Securities Dealers. The committee’s final report includes 20 recommendations for promoting transparency, ending allocation abuses, and improving information about initial public offerings.

And none too soon. The report was issued on May 29 — during a month in which only three companies filed plans for IPOs with the Securities and Exchange Commission. That’s practically a flurry of activity these days, but a precipitous drop from May 1999, when some 65 companies filed plans to go public.

In the ensuing four years, the market has been hammered with reports of underwriters doling out hot IPO shares to potential clients (“spinning”), investors who agreed to pay excessive commissions on other transactions, and investors who promised to purchase more shares in the aftermarket, pushing up the price. The report took issue with all of these practices and will be considered a basis for new rule-making at the exchanges and the SEC.

One recommendation that could affect CFOs requires a company’s code of ethics to include a policy regarding receipt of IPO shares by directors and executive officers. At the same time, underwriters would be prohibited from allocating IPO shares to directors and executives of companies with which they have an investment-banking relationship.

The report is “useful,” says Alexander Ljungqvist, a finance professor at New York University’s Stern School of Business, but falls short of full transparency into how banks build their “book” of investor bids and their allocations.

The committee suggested that banks provide such information to issuers. Ljungqvist, who advised the committee, argues it would be better to file book-building data with the SEC.

Pension Accounting: Looking for a New Benchmark

So what will replace the now-defunct 30-year Treasury bond as the benchmark for measuring pension obligations?

It’s a question that’s getting a lot of attention on Capitol Hill and from the business lobby, especially since the current interim measure will expire by year end. It’s also a question that finance chiefs would like answered, since so many plans are currently underfunded. “The longer we go without a replacement measure, the more pressure there is on companies because they can’t predict their future cash flows,” says Mike Johnston, a retirement practice leader at Hewitt Associates.

In May, the Bush Administration admitted that the current benchmark is inadequate. It opted not to make a permanent decision on how to value pension liabilities at that time. Instead, the Administration may extend the current 2002 law that allows employers to use a slightly higher discount rate to value their pension liabilities — which shrinks the mandatory funding obligations. Or it may still issue a proposal for long-term funding changes, including use of a yield curve.

By and large, companies — which faced a total pension shortfall of $220 billion at the end of 2002 — have lobbied hard for an alternative that is contained in a bill sponsored by Rep. Rob Portman (R-Ohio) and Rep. Benjamin Cardin (D-Md.) that would replace the current method with a benchmark that is based on long-term corporate bonds. The benefit of moving to such a benchmark, says David Zion, an accounting expert with Credit Suisse First Boston, is that “you’d have consistency between funding requirements and pension accounting.” More important, says Howard Silverblatt, an equity analyst with Standard and Poor’s, by raising the discount rate, “you could literally wipe away a company’s [pension] deficit overnight.”

Breaking the impasse is crucial, says Johnston. In Hewitt’s recent survey of 174 finance executives, 8 percent said they are already considering freezing or terminating their plans. A similar study of midsize firms by SEI Investments put that figure at 22 percent. “It would be a travesty not to get this fixed,” says Johnston, adding that even a long delay would “leave enough companies up in the air that they would take drastic action.”

Taking Action
Pension woes are forcing midsize U.S. firms to consider fixes.
Actions Taken or Under Consideration %
Adjust investment strategy 54
Increase contributions 44
Close defined-benefit plan 22
Convert to defined-contribution plan 16
Replace defined-benefit plan 15
Source: SEI Investments