Exam Alert: FINRA Establishes Exemption from Spinning Rule for Certain Funds of Funds

Effective February 3, 2014, FINRA has put in place a modification to its issue allocation rules. The change provides an exemption from the “anti-spinning” provision of FINRA Rule 5131. Continue reading

Effective February 3, 2014, FINRA has put in place a modification to its issue allocation rules. The change provides an exemption from the “anti-spinning” provision of FINRA Rule 5131.

Spinning refers to the practice of a firm allocating shares of a new issue to an investor’s account in exchange for that investor directing their company’s investment banking business to the firm. Spinning is generally prohibited.

The new exemption allows for a firm to allocate shares of a private fund (such as a fund of funds) to an account (such as a hedge fund) if both the account and the fund meets certain conditions. These conditions include that the fund:
-is managed by an investment adviser;
-has assets greater than $50 million;
-owns less than 25 percent of the account;
-is not a fund in which a single investor has a beneficial interest of 25 percent or more; and
-was not formed for the specific purpose of investing in the account.
The account must not look through to the beneficial owners of unaffiliated private funds invested in the account, except for beneficial owners that are control persons of the investment adviser managing the fund.

In addition, the adviser managing the account must be unaffiliated with the investment adviser managing the fund.

Source: FINRA Regulatory Notice 13-43: SEC Approves a Limited Exception From FINRA Rule 5131(b) to Permit Firms to Rely Upon a Written Representation From Certain Unaffiliated Private Funds

Further reading: Mondaq.com: FINRA Amends Its Rule 5131 To Ease “New Issues” Compliance Related To Certain Funds-Of-Funds

This alert applies to the Series 7 and Series 55.

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