On May 18, 2011, the SEC approved changes to new FINRA Rule 5131, Restrictions on the Purchase and Sale of Initial Equity Public Offerings, which (i) simplify the spinning provision, and (ii) delay the implementation of the spinning and market orders provisions to September 26, 2011. Notably, all other provisions of Rule 5131 remain effective May 27, 2011.
Changes to the Spinning Prohibition in Rule 5131
Rule 5131 prohibits the spinning of new issues. This means that FINRA members may not, in general, allocate shares of a new issue to any account in which executive officers and directors of current, as well as certain former or prospective, investment banking clients have a beneficial interest.
As originally approved, the spinning prohibition in Rule 5131 barred “investment banking personnel” from being involved, directly or indirectly, in the new issue allocation decisions of a FINRA member. Because the term “investment banking personnel” (i) was not defined in Rule 5131, and (ii) could arguably be applied to prohibit syndicate personnel from performing certain necessary functions, FINRA requested and the SEC approved the deletion of this component of the spinning provision.
Importantly, the prohibition on spinning in Rule 5131 continues generally not to apply to the following accounts:
- Institutional accounts exempted in FINRA Rule 5130, Restrictions on the Purchase and Sale of Initial Equity Public Offerings, which include, without limitation, certain registered investment companies, common trust funds, insurance companies, publicly traded entities, ERISA benefit plans, and charitable organizations; and
- Accounts in which the beneficial interests are owned to a “de minimis” extent by executive officers and directors of the company and persons materially supported by such executive officers and directors.
For purposes of Rule 5131, ownership to a “de minimis” extent means an aggregate 25% beneficial interest in such account. Rule 5130 contains a different “de minimis” exception, applicable to certain restricted persons with an aggregate 10% beneficial interest in an account.
Spinning and Market Orders Prohibitions Delayed Until September 26, 2011.
The market orders provision of Rule 5131 states that no FINRA member may accept a market order for the purchase of shares of a new issue in the secondary market prior to the commencement of trading of such shares in the secondary market.
To develop processes, build systems, and create compliance policies and procedures, FINRA members requested additional time to prepare for the implementation of the spinning and market orders prohibitions of Rule 5131. Accordingly, FINRA requested and the SEC approved a delay from May 27, 2011 to September 26, 2011, for these two provisions. The other provisions of Rule 5131 remain effective May 27, 2011.
FINRA member broker-dealers should continue implementing the provisions of Rule 5131, with the exception of the deleted prohibition on the involvement of investment banking personnel in new issue allocations. With the exception of the spinning and market order prohibitions, which are now effective on September 26, 2011, implementation of Rule 5131 provisions should be completed by May 27, 2011.
Fund managers that manage accounts or funds that purchase new issues should continue to prepare to respond to requests from FINRA member broker-dealers for information about the ownership of the beneficial interests of their accounts or funds. This information will be used by the broker-dealer to ensure that any new issue allocation complies with the exceptions to the spinning prohibition in Rule 5131.