FINRA Rule 5130: Restrictions on the Purchase and Sale of Initial Equity Public Offerings

FINRA Rule 5130, titled “Restrictions on the Purchase and Sale of Initial Equity Public Offerings Supervision,” is designed to uphold the integrity of the initial public offering (IPO) process for equity securities.

Below is everything you need to know about FINRA Rule 5130, its key definitions and red flags to help mitigate the risk of regulatory sanctions.

What is FINRA Rule 5130?

FINRA Rule 5130 protects the integrity of equity IPOs by requiring that:

• Member firms make bona fide public offerings of securities at the stated offering price
• Member firms do not withhold for their own benefit or to reward people who are in a position to direct future business to them
• Industry insiders (e.g., member firms and their associated persons) are prevented from unfairly acquiring new issues for personal benefit at the expense of the public

FINRA Rule 5130 provides that, except as otherwise permitted under the rule, a member firm or an associated person may not:

• Sell a new issue to an account in which a “restricted person” has a “beneficial interest”
• Purchase new issues in any account where the firm or individual has a beneficial interest
• Continue to hold new issues acquired as an underwriter or selling group member

What are the key definitions of FINRA Rule 5130?

“Restricted person” includes:

• Broker-dealers
• Owners of broker-dealers
• Broker-dealer personnel
• Finders or fiduciaries to the new security being offered
• Portfolio managers

“Beneficial interest” refers to:

“Any economic interest, such as the right to share in gains or losses.” This does not include:

• Management or performance-based fees for operating a collective investment account
• Fees for acting in a fiduciary capacity

Who does FINRA 5130 apply to?

FINRA 5130 applies to all FINRA member firms, including:

• Broker-dealers
• Associated persons affiliated with such firms

What are the recordkeeping and retention period requirements for FINRA 5130?

Member firms must maintain comprehensive records and documentation demonstrating compliance with FINRA Rule 5130, including all information related to account eligibility for new issues. These records must be preserved for at least three years after the last sale of a new issue to the account, in accordance with FINRA Rule 5130 and SEC Rule 17a-4.

Firms must retain records such as:

• Documentation verifying customer eligibility for IPO allocations (to ensure no restricted person receives improper benefit)
• Records identifying restricted persons and their beneficial interests
• Due diligence materials related to beneficial ownership and compliance reviews

Retention period:

• At least 3 years from the date the record is created or received
• First 2 years must be kept in an easily accessible location

What are the penalties for FINRA 5130 violations?

Under FINRA’s 2024 Sanctions Guidelines, a violation of FINRA 5130 can result in:

• Significant monetary sanctions ranging between $2,500 to $20,000
• Suspension or a bar of up to two years in more serious cases

FINRA may impose larger fines, suspensions, or bars for egregious violations involving market manipulation or fraud, particularly if investor harm occurred.

What are the principal considerations for determining FINRA 5130 sanctions?

FINRA’s 2024 Sanctions Guidelines list four principals that will be considered for determining the level of sanctions for a FINRA 5130 violation:

• The type of restricted accounts involved (absolute or conditional)
• Whether the respondent has a direct interest in the restricted accounts or has misrepresented information
• Whether the case involves a bona fide dispute regarding normal investment practice, proportion of allocation, or size of allocation
• Whether misconduct was intended to improperly benefit another person or entity

How Smarsh can help with FINRA Rule 5130 compliance

Smarsh provides a unified, AI-powered compliance platform that helps broker-dealers and FINRA member firms meet the rigorous standards of FINRA Rule 5130. Through comprehensive communication capture, supervision, and advanced risk detection, Smarsh enables firms to stay compliant, reduce manual workloads, and respond proactively to potential violations.

• Capture every conversation. Archive communications across all your most important communications channels (email, messaging, voice, social, mobile) for complete visibility and compliance.
• Monitor social media and encrypted chat mentions. Detect attempts to promote or manipulate IPOs through unapproved channels or hidden groups.
• Detect hidden patterns and red flags. Use AI and customizable risk scenarios to identify unusual funding discussions, nominee arrangements, or suspicious group coordination around IPO shares.
• Correlate conversations with transactions. Connect flagged messages with trading records to catch mismatches — like allocations inconsistent with a client’s risk profile or investment objective.
• Maintain audit-ready records and reporting. Smarsh provides real-time supervisory dashboards, full audit trails of communication review, and exportable reports for internal audit or regulatory examinations to ensure transparency around account activity and oversight.
• Scale with confidence. Trusted by global financial firms, Smarsh helps you meet regulatory expectations while managing growing communication volumes.