Initial Public Offerings:

Guidance Needed on Disclosure of Underwriters' Disciplinary Histories

GGD-96-5: Published: Jun 6, 1996. Publicly Released: Jun 6, 1996.

Additional Materials:


Thomas J. McCool
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GAO addressed concerns about the initial public offerings (IPO) allocation process, focusing on: (1) the factors that influence underwriters to sell IPO shares to institutional investors and individual investors; (2) disclosure requirements concerning the history of disciplinary actions taken against an underwriter; and (3) Securities and Exchange Commission (SEC) rules governing the IPO market.

GAO found that: (1) most underwriters primarily sell IPO to institutional investors because of economic factors and their belief that these investors can buy larger blocks of IPO shares, hold their investments longer, and assume greater financial risk; (2) underwriters market IPO to individual investors when their firms have a high percentage of individual investor clients, the company is well known to individual investors, or institutional investors have little interest in the IPO; (3) SEC and the National Association of Securities Dealers (NASD) give underwriters wide latitude in marketing and allocating IPO shares among institutional and individual investors; (4) SEC does not require companies to disclose in their prospectus certain information about their underwriters' criminal or disciplinary histories except when market manipulation and fraud are involved; (5) SEC and self-regulatory organizations imposed 25 formal disciplinary actions for securities violations on 13 of 34 underwriting firms for the 5-year period prior to issuance of IPO; and (6) SEC could provide investors a better means of assessing risks associated with IPO if it required companies to disclose material information on underwriters' disciplinary histories in their prospectus.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: SEC has decided not to accept this recommendation. SEC believes that it has sufficient authority to require disclosure of an underwriter's disciplinary history if, in SEC's opinion, such disclosure is necessary to protect investors.

    Recommendation: To improve disclosure to investors who purchase IPO, the Chairman, SEC, should amend SEC Regulation S-K and IPO registration forms to require that companies disclose in the prospectus information about the underwriter's disciplinary history that is material to assessing the risk of an IPO investment, and provide guidance on the type of information that is material.

    Agency Affected: United States Securities and Exchange Commission

  2. Status: Closed - Not Implemented

    Comments: According to SEC Corporation Finance Division staff, NASD does not contemplate including a reference to disciplinary information may be available about the underwriter of a securities issuance. They currently do not anticipate any further action relating to this issue.

    Recommendation: SEC should incorporate a statement in the prospectus that tells investors how to obtain additional information from NASD on the underwriter's disciplinary history.

    Agency Affected: United States Securities and Exchange Commission


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