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.

Exam Alert: Flipping may only be discouraged through penalty bids

“Flipping” is when a customer sells a new issue into the secondary market at a profit shortly after the IPO. Underwriting managers may discourage this by Continue reading

“Flipping” is when a customer sells a new issue into the secondary market at a profit shortly after the IPO. Underwriting managers may discourage this by imposing penalty bids on brokers whose customers flip securities. Some firms have sought to independently recoup commissions paid to such brokers. Effective May 27, 2011, FINRA requires that flipping only be punished through penalty bids applied to the entire syndicate by the underwriting manager. Relevant to the Series 24, Series 62 and the Series 79 exams.

http://www.finra.org/Industry/Regulation/Notices/2010/P122491

Exam Alert: Underwriters must report indications of interest and final allocations to issuers

Effective May 27, 2011, during a new issue, the underwriting manager must report indications of interest and aggregate demand for the security to Continue reading

Effective May 27, 2011, during a new issue, the underwriting manager must report indications of interest and aggregate demand for the security to the issuer.  After the settlement date of the new issue, a report of the final allocation of shares to institutional investors must be provided to the issuer, along with the aggregate sales to retail investors.  This change was made to increase transparency in the book-building process. Relevant to FINRA Series 7, Series 24, Series 62 and the Series 79 Investment Banking Exam.

http://www.finra.org/Industry/Regulation/Notices/2010/P122491

Exam Alert: FINRA prohibits “spinning”

“Spinning” is when a broker allocates IPO shares of a hot issue to favored customers, which the customers can then sell at a profit on the Continue reading

“Spinning” is when a broker allocates IPO shares of a hot issue to favored customers, which the customers can then sell at a profit on the secondary market.  Effective May 27, 2011, FINRA has prohibited spinning.  If it looks like there is a relationship between a customer and the broker-dealer, the broker-dealer cannot sell shares of new issues to that customer.  Note that certain allocations are exempt from this rule.

http://www.finra.org/Industry/Regulation/Notices/2010/P122491

Exam Alert: FINRA prohibits quid pro quo allocations

Effective May 27, 2011, FINRA member firms and associated persons may not offer or threaten to withhold shares of an allocation of a new issue in order to Continue reading

Effective May 27, 2011, FINRA member firms and associated persons may not offer or threaten to withhold shares of an allocation of a new issue in order to receive excessive compensation.  This prohibited behavior is known as a quid pro quo allocation, where the member or associated person gives preferential allocation in exchange for a kick-back. Relevant to Series 24, Series 62 and Series 79.

http://www.finra.org/Industry/Regulation/Notices/2010/P122491