Facebook IPO Prompts Call by Issa for SEC Review of Rules

Facebook Inc. (FB)’s initial public offering demonstrated flaws in U.S. securities laws that must be fixed, according to House Oversight and Government Reform Committee Chairman Darrell Issa.

“The Facebook IPO taught us that, at a minimum, the IPO process suffers substantial flaws,” Issa wrote in a June 19 letter to U.S. Securities and Exchange Commission Chairman Mary Schapiro. “In fact, it appears the entire IPO regulatory framework, based on an outdated Securities Act of 1933, fails to provide a market-based solution to IPO pricing.”

In a 15-page letter, Issa also raised questions about whether underwriters have too much power to determine the share price of an IPO. Morgan Stanley (MS), Facebook’s lead underwriter, has been criticized for improperly pricing the Menlo Park, California-based social networking company at $38 during the May 18 IPO.

Facebook rose 0.8 percent to $31.84 at the close in New York today.

“The share price decline that followed the Facebook IPO creates concerns that the securities regulation under the Securities Act of 1933 (Securities Act) places substantial discretion in the hands of underwriters,” Issa wrote to Schapiro. “One chief concern relates to the ability of underwriters to dictate pricing while only indirectly considering market supply-and-demand in their price evaluation.”

IPO Questions

Issa asks Schapiro to respond by July 3 to questions that include how IPOs are priced and how information is communicated to investors in advance of an offer.

John Nester, a spokesman for the SEC, declined to comment on the letter, which was reported earlier today by The Wall Street Journal. Pen Pendleton, a spokesman for Morgan Stanley, declined to comment.

Facebook’s IPO has been dogged by two central issues. A technical glitch at Nasdaq OMX Group Inc. (NDAQ) on the morning of the IPO prevented 30 million shares from participating in the auction. Meanwhile, Facebook faces lawsuits filed by retail investors who claim that some institutional investors received advance word of a potential revenue decline at the company that retail investors weren’t privy to.

Schapiro has said the Facebook IPO raises “issues” for the SEC to review.

“The IPO has probably worked pretty well for many years but that doesn’t mean we shouldn’t take this opportunity to step back and look at whether the rules and regulations in place need to be updated to look at whether the technology and mechanisms through which people participate in the IPO process need to be looked at,” she said in an interview on CNBC today.

To contact the reporter on this story: Steven Sloan in Washington at ssloan7@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net

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