The National Association of Securities Dealers announced it has ordered three firms – Morgan Stanley & Co, J.P. Morgan Securities, Inc., and Goldman, Sachs & Co. – to pay more than US$2.9 million following sales of restricted securities in violation of lock-up agreements.

The regulator censured the firms and ordered Morgan Stanley to pay a fine of US$150,000 and disgorgement of more than US$2.5 million in ill-gotten profits. J.P. Morgan was ordered to pay a fine of US$150,000 and Goldman Sachs was fined US$125,000. Each of the firms settled the actions without admitting or denying the allegations, but consented to the entry of the NASD’s findings.

Each of the firms acquired securities from issuers in private placements prior to each issuer’s initial public offering, and subsequently served as an underwriter of the issuer’s IPO. Under NASD rules, certain private placement securities were deemed underwriting compensation and were restricted from sale for a period of one year from the date of the IPO. Also, NASD rules allow that if a member firm agrees to restrict the sale of securities for an additional period of time – one or two years – additional discounts would be provided to the value assigned to the shares for purposes of determining underwriting compensation.

The NASD says each of the firms violated its rules by failing to take reasonable steps to ensure compliance with the representations they made regarding restrictions on the sale of the securities. And, they failed to establish and maintain an adequate supervisory system to ensure securities would not be sold prior to the expiration of the lock-up periods.

“NASD’s rules that regulate the underwriting process, including lock-up requirements, ensure that the underwriting terms and arrangements are fair and reasonable,” says NASD vice chairman Mary Schapiro. “Lock-up requirements may be imposed to bring underwriting compensation into compliance with NASD guidelines and to protect investors in IPOs from the potential for dilution and manipulation if underwriters were to sell large amounts of an IPO issuer’s shares into the aftermarket. These firms’ failure to have policies in place to ensure compliance with the rules and to minimize the opportunity for underwriters and related persons to realize a quick profit from the sale of pre-IPO shares hurt the integrity of the underwriting process and the confidence of investors.”