By Amy Leisinger, J.D.
The Investment Adviser Association has submitted comments to the SEC on the Financial Industry Regulatory Authority’s proposal to amend FINRA Rules 5130 and 5131 governing purchases and sales of initial public offerings. According to IAA, the proposed changes would remove certain barriers to capital formation and increase the availability of new issues. However, the organization contends, certain conditions in the proposed changes to exemptions are overly narrow, and FINRA should modify them to remove quantitative thresholds.
In its comments, IAA notes that FINRA’s IPO rules are designed to ensure that broker-dealers make fair offerings of securities and that they and other insiders do not take advantage of their positions for their own benefit. However, the organization explains, IAA members’ clients may not currently meet the requirements of foreign investment company exemption from prohibitions on investment and are sometimes restricted in their ability to invest in new issues on behalf of foreign plan clients. The proposed changes would address these concerns, IAA states.
Quantitative thresholds. IAA takes issue, however, with the quantitative thresholds in the proposed foreign plan exemption, specifically the requirement that a foreign plan have at least $10 billion in assets and 10,000 participants to qualify. According to IAA, some of its members come close to, but do not meet, these thresholds, and prohibiting these entities from investing in new issues on behalf of foreign plan clients would not serve the policies underlying the rule. Further, the organization contends, a specific minimum of assets and clients is not necessary to show that a foreign plan lacks a concentration of interest, and the other conditions of the proposed exemption are sufficient to prevent manipulation or abuse.
IAA also urges FINRA to remove the quantitative thresholds from the foreign investment company exemption. The proposal would create alternatives to the current requirement that no person owning more than 5 percent of a foreign investment company’s shares be a restricted person—that the company has 100 or more direct owners or 1,000 or more indirect owners. However, according to IAA, none of these three quantitative tests is necessary to demonstrate that a foreign investment company is widely held. Quantitative tests are not used to ensure that a U.S. investment company is widely held, and they should not be deemed necessary for a foreign public fund, the organization states. The conditions that the fund is listed for sale to the public and was not formed for the purpose of investing in new issues are sufficient to achieve the objectives of the rule, IAA concludes.